One of the most important parts of the home buying process is getting a mortgage with the best interest rate possible. Since most homeowners opt for a thirty year mortgage, an interest rate becomes an important component of how much you’ll be paying every month for the next 360 months! Interestingly enough, as much as people want a low interest rate and mortgage payment, many don’t understand what exactly makes up an interest rate and the difference between nominal and real interest rates.

So how does the financial world define an interest rate? According to the Economics Glossary, an interest rate is defined as the yearly price charged by a lender, in order for a borrower to be able to obtain a loan. This rate is usually expressed as a percentage of the total amount loaned on the home.

Many young homeowners hear about interest rates in the news and how the housing industry revolves around banks and selling loans. Often times, however, there is so much different information about interest rates that borrowers don’t understand how it really affects their mortgage payment.

The different kinds of interest rates are what will affect how much you will be paying in interest over the course of your loan. While a loan officer will more than happily help show you how to calculate interest break downs, sometimes in the case of adjustable rate mortgages and balloon mortgages, they can tend to highlight the positives and downplay the occurrence of a worst-case-scenario situation. While loan officers may be friendly and helpful, they tend to have their company and their own commission in mind over your financial well-being, so it’s always important to do your own research and run your own numbers.

What is the difference between a nominal interest rate and a real interest rate? When you’re talking interest rates, you’re most likely referring to nominal rates, since these are the ones where the effects of inflation have not been accounted for. These rates are the actual interest paid. Real interest rates are rates where inflation has been accounted for, since changes in the nominal rate often move with the inflation rate. What this means, is that real interest rates could be negative, since inflation has surpassed their value. For more information about nominal interest rates and inflation, check back on our homes for sale in Denver CO blog next week as we’ll dive further into the issue of interest rates.

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