Personal Finance Unit 2 Term Paper

In case the Central bank reduces the interest rate, increasing demand for credit, because lower lending rates can also encourage the consumption and investment. As a rule, Equity and housing prices increase the wealth of individuals, which in turn increase their propensity and ability to borrow, and thereby their propensity and ability to spend. Thus, the asset prices rise up.

An interest rate is the portion of the loan charged to a borrower. The interest rate is usually expressed as an Annual Percentage Rates or APR. A lower interest rate is better for a person receiving a loan because you don’t have to pay back a lot of money that you never got to use. That seems like common sense, right? For example, people would rather pay a credit union’s average APR of 2.64% than a bank’s traditional 4.78%

c. Smaller payments mean more time in debt. d. Your lower interest loans also get rolled into the deal so you end up with minimal savings.

That's why it's a good idea to understand the driving forces behind your mortgage rate. It will help you understand when it's a good idea to lock in a rate, or at the very least, help you make sense of your investment.

b. A need-based federal loan with a lower, variable rate for those with high credit scores

New loan offerings make it easier to buy a home, but harder to pick which mortgage is right for you. The standard 30-year fixed rate mortgage allows predictable payments. If you’re planning on moving quickly, consider an adjustable rate mortgage, which has low

The ratio of adjustable-rate mortgages to fixed-rate mortgages is lowest when interest rates are low because borrowers prefer to lock in the low market rates for long periods of time. When rates are high, adjustable-rate mortgages allow borrowers the potential to realize relief from high interest rates in the future when rates decline.

On a personal level, high interest rates can deter you from buying a house or a car because the cost of financing would be too

* By reducing the interest rate or by changing the terms from floating rate to fixed rate - the interest rate on the borrower's mortgage is tied directly to the monthly installment.

If you decide to get an adjustable rate mortgage over a fixed rate mortgage, make sure you know exactly how high you can go with a fluctuating interest rate and still be comfortable with the monthly payments. Factor in the “wiggle room” in your monthly budget, just in case. This could be the difference between being able to afford to keep your house and losing it to foreclosure, if the rate goes skyrocket in the

Fixed interest rate means repayment of home loans in fixed equal installments over the entire period of the loan. In this case, the interest rate doesn't change with market fluctuations. During the early part of the loan tenure the majority of monthly payments are used to service the interest and the principal is served in the later parts of the tenure.

Is your credit strong enough to get the best deal? No matter what rates you see advertised, the best rates are reserved for people with the best credit profiles. If your credit has deteriorated since you first purchased the home, the rate on the new loan may be adjusted higher. It 's even possible that the rate on the new loan will be higher than what you have right now, due to negative changes in your credit profile.

Interest rates have a major economic impact on the real estate market. Interest rates directly affect property sales. Residential property realizes the greatest affect as interest rates have a considerable influence on a homebuyer’s capability to purchase a new property. The customer is affected when there are significant increases or decreases in interest rates. Declining interest rates lower the costs of obtaining a mortgage; this in turn creates higher demand for homes, and pushes home prices up. Conversely, high interest rates increase the costs to obtain a mortgage; these increases lower the demand for homes, which creates a decline in home prices. (Stammers, 2016)

Interest rates are normally associated with inflation. Consumer spending and economic growth is encouraged as a result of low interest rates. However, inflation can occur if supply is lower than demand due to consumption increases but this is indeed not a bad outcome though foreign trade and investment will be lacklustre as opposed to the cash rate being higher which more likely attracts foreign investment and trade.

The two central facts are these: for reasons we’ll discuss, buyers buy a monthly payment, not a house price, and buyers buy as much house as they can afford. This brings us to the heart of the matter: mortgages that require no down payment, and only interest payments, alter the structure of the demand curve for real estate, in a way that is harmless enough when interest rates are high, but which drives a bubble at low interest rates. Specifically, they make housing prices inversely proportional to the interest rate. If interest rates are cut in half, house prices double. When those rates double, house prices are slashed in half. When interest rates are large, they are not likely to double or halve, but when interest rates are small, a small adjustment can be a big percentage change, and the danger of big swings in housing prices is appreciable, even inevitable. With no down payment, no amortization and closing costs folded into the loan, the only issue in affording a house is the monthly payment, which is the house price multiplied by the interest rate. If interest rates are cut in half, the house you can buy with a given monthly payment costs twice as much. But the same number of people with the same income distribution is competing for a fixed stock of housing. The house price is bid up until the new monthly payment at the new interest rate matches the old monthly payment at the old interest rate. The house price varies inversely