Interest Rate Analysis

Interest Rate Analysis
••• money money money image by Tribalstar from

Interest rates are the rate at which banks and other lenders will lend people money. It is their profit margin—their product is debt, and the interest rate (expressed as a percentage) is what their customers pay them for that product.

Money Supply

The lower interest rates are, the more money is available. This is because people are more inclined to borrow money to buy homes and start businesses if the money comes at less of a cost. Therefore, the converse is also true.

Federal Policy

Long-term interest rates are ultimately at the discretion of the Federal Reserve, an institution that buys securities (lowering the money supply) to raise interest rates and sells them (raising the money supply) to lower rates. This affects the rate at which banks lend money to one another, which in turn affects the rate at which banks lend to you.

Fixed and Adjustable

Individuals can get fixed and adjustable interest rates on their mortgages. The former tends to be higher than the latter at the loan's inception, but the latter can change over the course of the loan. An analysis of this feature of interest rates reveals that fixed rates are more expensive but carry lower risk, while adjustable interest rates are cheaper but at a higher risk.