You may have heard a lot about interest rates this month, and current events are pushing them up steadily. Increasing borrowing rates greatly affects the real estate market. As we look ahead, it’s time to get familiar with these rates and what they mean for you, the home buyer.
An interest rate is an amount charged on any form of debt. It is the amount borrowers pay to the lenders. Any loan, varying from a car loan or education loan to a mortgage, charges a rate of interest. Interest rate is a crucial element that impacts each section of the economy.
The following are the five things everyone should know about interest rates.
1. Major Factors Determine the Repayment Amount
A lot of external factors play a crucial role in determining the total repayment amount for a loan. Major factors include the source and the length of the loan. Forces of supply and demand in an economy influence the interest rate. An increase in demand for credit creation leads to high-interest rates. But, a rise in the supply of credit causes low-interest rates. Inflation has a direct effect on the rate of interest. The higher the inflation rate, the higher the interest rate.
2. The Impact of Interest Rates
Both a high and low-interest rate affects both the consumer and business. When the rate of interest is high, borrowing can be expensive. Thus fewer people and businesses can afford loans. This, in return, will reduce the spending. Whereas when the interest rate is low, borrowing can be less expensive. More businesses and consumers can afford it, causing an increase in spending.
3. How Banks Make Money Using Interest Rates
When buying a house or a car, one borrows money from the bank.
The bank charges a specific amount from the borrower along with the principal. When one deposits money with the bank, the bank pays some amount of interest on the deposited amount.
The bank uses the deposits made with it to provide loans to the borrowers. They charge higher interest rates from the borrowers. Whereas, the interest paid to the depositors is lower. The difference is the profits for the banks.
4. Risk & Credit Score
Determining the amount of interest charged is a complex process. The bank usually charges a higher interest rate when chances of repayment are low. The interest rate is proportional to the risk associated with the borrower.
For this reason, it’s so important to maintain a good credit score as your credit score is a major indicator of risk associated. The higher the credit score, the lesser the rate of interest charged.
5. Types of Interests Rates
The interest charged can be either fixed or floating. Fixed-rate of interest implies that the percentage is constant throughout the loan period. It provides a sense of certainty. A floating interest rate entails that the rate is subject to revision every quarter. The interest rate will be exclusive to the base rate. Economic factors determine the floating rate of interest. Changes in the base rate will affect the Interest rate of the loan.
When you're ready to sell a home, find your next ideal property or invest in real estate - whether it's today, or tomorrow or six months from now - we're here to be your guides, listeners, and problem solvers! Let's make your dreams a reality. Contact us directly via text or call at (253) 549-6897.