Definition:
Interest is the cost of borrowing money, usually expressed as a percentage of the loan amount. In real estate, it’s the fee a borrower pays to a lender in exchange for using their money to buy a home.
Example:
Emma takes out a $300,000 mortgage with a 6% interest rate. Each month, part of her mortgage payment goes toward the loan amount (the principal), and the rest goes to interest, which is the lender’s profit for providing the loan.
Explanation:
When buyers get a mortgage to purchase a home, they agree to repay the loan over time, typically in monthly payments. Each of those payments includes both principal (the actual loan amount) and interest (the cost of borrowing). The interest rate is set by the lender and can be fixed (stays the same) or adjustable (can change over time).
Early in the loan term, a larger portion of the payment goes toward interest, while a smaller portion reduces the principal. Over time, this shifts, and more of the payment goes toward reducing the loan balance.
Interest rates are influenced by many factors, including the borrower’s credit score, loan type, down payment, and broader economic trends. Even small differences in interest rates can significantly affect how much a borrower pays over the life of the loan.
Why is Interest Important in Real Estate Transactions?
Interest is important because it directly affects the total cost of a home and the buyer’s monthly mortgage payments. For buyers, a lower interest rate means more affordable payments and long-term savings. For sellers, changes in interest rates can impact how many buyers can afford to purchase their home. Understanding interest helps both parties make informed decisions about timing, affordability, and negotiating financing terms.