Interest Rate Definition
In the context of real estate loans, “interest rate” refers to the amount a lender charges a borrower for the use of money, expressed as a percentage of the principal loan amount. The interest rate is typically determined by the lender based on various factors including market conditions, the borrower’s creditworthiness, and the type of loan. Depending on the loan terms, the interest rate can be fixed (remaining the same over the life of the loan) or variable (adjusting periodically based on changes in the reference interest rate).
Interest Rate Example
An example of an interest rate can be found in the loan used to purchase an investment rental property (also called a mortgage). This interest rate directly affects your monthly mortgage payments and the overall cost of the investment property over time. Let’s say you’re buying a rental property priced at $200,000 and finance the purchase with a 30-year fixed-rate conventional mortgage. Your bank offers you a loan with a 4.5% annual interest rate. This means that each year, you’ll owe 4.5% of the outstanding loan balance in interest to the bank. In the first year, assuming you put down 20% ($40,000) and borrowed the remaining $160,000, you would pay approximately $7,200 in interest (4.5% of $160,000). As you make payments on the mortgage, the principal balance decreases, and so does the amount of interest you pay each year.
Interest Rate Synonyms
- Cost of borrowing
- Finance charge
- Borrowing cost
- Lending rate
- Borrowing rate
- Credit rate
- Loan rate
- Yield