What are Interest Rates and Why Are They Important?

Interest Rate

Summary: To break it down into its simplest form: an interest rate is a percentage of the overall loan you borrow converted into an annual amount you are charged for borrowing that loan. The purpose of an interest rate is to let individuals purchase on credit. Credit can be applied in many instances, but for the purpose of this article we will be discussing one of the biggest lines of credit you may take out: a home mortgage loan.

Interest is the rate a buyer pays to borrow money from a lender. The amount of interest one pays depends on the product. Interest on a housing loan is different than interest rates on credit cards, for example.

The purpose of interest is to help individuals buy the necessities they need when they do not have the funds. For example, purchasing a home for $250,000. The average individual may not have $250,000 in cash lying around but they can apply for a home mortgage loan and make monthly payments.

United States’ central bank, the Federal Reserve Bank, sets the interest rates. When interest rates fluctuate, it affects consumers in two ways:

  1. When interest rates increase, buyers have less buying power.
    • Products tend to be more expensive.
  2. When interest rates decrease, buyers have more buying power.
    • Products are more affordable.

It is important for homebuyers to stay aware of the current interest rate to put themselves in the best financial situation possible.

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