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An interest rate in real estate is the cost a borrower pays to a lender for the use of their money. When homebuyers take out a mortgage loan to purchase a property, they agree to pay back both the principal (the original loan amount) and the interest (the cost of borrowing).
Interest rates fluctuate based on various factors including:
- The overall state of the economy
- Political and global events
- Inflation rates
- The borrower’s financial profile (credit score, debt-to-income ratio)
- Loan details like the loan term and loan-to-value ratio.
The mortgage payment typically consists of PITI:
- Principal: The actual amount borrowed.
- Interest: The cost of borrowing from the lender.
- Taxes: Property taxes due to local governments.
- Insurance: Homeowner’s insurance and, in some cases, mortgage insurance.
A lower interest rate means lower monthly payments, and even a small difference in rates can lead to significant savings over time. For example, the difference between a 7% and a 3% interest rate could result in hundreds of dollars saved monthly, which is why people rush to buy or refinance homes when interest rates drop.
