How Do Interest Rates Work?

October 18, 2022

Interest rates in real estate refer to the cost of borrowing required by the lender issuing a mortgage. Interest rates are also one of the main factors that determine your monthly mortgage payment, and a higher interest rate corresponds with a higher monthly payment. This is why it’s so important to put yourself in the best possible position to get a reasonable interest rate when applying for a home loan.

Do you want to know everything about how interest rates work? Continue reading to find out what interest rates are and why they are important for first-time home buyers and real estate investors.

How do interest rates work?

Interest is essential in the home-buying process since it allows mortgage lenders to make money when issuing borrowers a loan. They collect the interest each month as a small price to pay for allowing people to purchase homes worth hundreds of thousands or millions of dollars. Without collecting interest, mortgage companies wouldn’t be able to issue loans to millions of American homeowners.

Interest rates are influenced primarily by the state of the real estate market and the strength of the borrower’s application. Borrowers with credit scores above 800 often get the best interest rates while those with credit scores in the 600 range or lower won’t get favorable financing terms. Interest rates are also influenced by the Federal Reserve, which regulates the housing market and sets interest rates.

Interest rates and investment properties

Real estate investors must have a comprehensive understanding of how interest rates work and how they vary from investment properties to primary residences. 

For example, investment properties often have higher interest rates due to the risk the lender takes on with homes that aren’t the buyer’s primary residence. A higher interest rate allows the lender to collect more money to make up for the risk of lending to real estate investors. 

Interest rates for first-time homebuyers

First-time home buyers often struggle with getting reasonable interest rates due to the lack of credit history and the small number of credit accounts they have open. 

Additionally, many first-time home buyers make the mistake of not shopping around lenders to see who can offer the best interest rate and financing terms. Our biggest tip for first-time homebuyers is to learn about the real estate process and loan options to ensure you get the best rate possible when applying for a mortgage.

Final thoughts

Anyone looking to buy a home or become a real estate investor needs to know the basics of how interest rates work and how to get the best interest rate possible when buying a home. This article should get you started with understanding interest rates, but there is plenty more information available that will help you learn more about interest rates.

Are you looking to buy or sell your home in the Massapequa area? The Kim Holland Homes Team is trusted for getting our clients the results they expect and deserve. Contact Kim today to find out why now is the best time to buy a home in the Massapequa area.