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Market Value Monday: Interest Rates

Basic Interest Rate Concepts

When you take out a loan, you must pay interest on the percentage of balance you have borrowed from your bank of choice. There are several types of interest rates that can occur, and knowing more about them can help you with your mortgage. By understanding more about interest rates and how they effect the market, more financially sound decisions can be made among homeowners. There are fixed interest rates and adjustable rate mortgages that can happen in the market today. Interest rates are controlled by the Federal Reserve and are directly related to the U.S. Treasury Bonds. To predict future swings in interest rates it is helpful to look at the shape of the yield curve. The yield curve represents the yields that occur in the U.S. Treasury bonds.

When the curve of the yields is downward sloping or flat, this indicates that the market has predicted the Federal Reserve will keep short-term interest rates steady or move them higher. In contrast, the opposite is predicted when the slope of the yield curve is upward sloping. The steepness of the yield curve is also an indication of by how much the market is predicting the Federal Reserve to raise or lower interest rates.

There are actually two very common interest rates that are used by banks. One is simple interest and the other is compound, both very popular in the market today. Simple or nominal interest is where money is paid only on your money that is in your bank account. This means the bank calculates your interest for a mortgage on the principal amount of your loan that you took out from the bank. Compound interest however, is where interest is added to your balance on a regular basis. This can also be described as your interest earning interest or interest calculated on both principal loan and interest accumulated combined.

Educating yourself on the different types of interest and how they affect your loans can be extremely beneficial in the long run. Lots of factors go into owning a home and have influence on the real estate market in one way or another. Please don’t hesitate to contact our agents further about interest rates, they are willing to help in any way possible!


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