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Interest Rate
A rate which is charged or paid for the use of money
is termed as an Interest rate. An interest rate is often expressed
as an annual percentage of the principal. An interest rate is
calculated by dividing the amount by the amount of principal.
Interest rates often change a result of inflation and Federal
Reserve policies.
In other words. Interest rate is the price for
borrowing money. Interest rate is subjected to move up and
down, reflecting various factors of the economy. The most
significant factor is the supply of funds, available for loans
from lenders and the demand from borrowers. If the demand for
borrowing is higher than the funds that are available, the interest
rate is subjected to be raised in order to discourage
borrowing.
The interest rate is divided two major
categories:
" Simple Interest rate
" Compound
Interest rate
Simple Interest Rate: Simple Interest rate is the
product of principal, the interest rate per period and the number of
time periods.
Compound Interest Rate: Compound interest rate is
almost similar to simple interest rate, only the principal changes
with every time period in this case
Interest rates directly affect the credit market
because higher interest rates make borrowing more costly. By
changing interest rates, the Federal Reserve tries to achieve
maximum employment, stable prices and a good level growth. As
interest rates drop, consumer spending increases, and this in turn
stimulates economic growth.
Mortgage loans are basically classified on the basis
of the interest rate charged on the loan. Thus, in the
mortgage loan market , interest rate is divided in two major broad
categories:
Fixed interest rate mortgage
Adjustable
interest rate mortgage
Fixed interest rate mortgage: Fixed
interest rate mortgage are preferred by those who have a clear
planning for the future. The fixed interest rate mortgages are
preferred because the interest on the mortgage stays fixed over a
fixed period of time. Fixed rate mortgage is suggestible for first
time buyers or anyone on a budget who is in a look-out for the
stability of a set monthly repayment. With a fixed rate mortgage
loan, the borrower has the security of knowing the exact amount that
one has to repay each month, despite the changes in the interest
rates.
Adjustable interest rate mortgage:
Adjustable rate mortgage are mortgage with an interest which is
linked to an economic index. In adjustable rate mortgage, the
interest rate and the payments are periodically adjusted up or down
as the index changes. The borrower is at a benefit when the interest
rate falls. The initial interest rate of the adjustable rate
mortgage is lower than that of a fixed rate mortgage. This structure
of interest rate is suggestible if you are planning to pay off the
loan within a short period of time.
Besides, the fixed and adjustable rate mortgage, there
exists many newer mortgages with a different interest rate
structure. Convertible mortgage are a type of mortgage where in the
borrower has the option to change the loan's interest rate after
some period of time or some specified movement in the interest rate.
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