Lesson 52
What Does A Loan Really Cost You?
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Understanding Interest Rates & How They Affect Housing Prices
About The Video: As of 2024, approximately 65.6% of Americans own homes, but this figure is expected to decline significantly over the coming years due to the rising disparity between home prices and median incomes. The video discusses the impact of economic conditions and interest rates on the housing market, explaining that high interest rates make borrowing expensive, leading to decreased demand and subsequently lower home prices. Conversely, when interest rates are low, borrowing becomes easier, spurring competition and driving home prices up. Mr. Kazanjian highlights the unique challenges of the Long Island housing market, noting that high salaries and proximity to New York City contribute to inflated prices. The video concludes by emphasizing the importance of understanding financing options and the implications of interest rates when considering home purchases.
What Are Interest Rates?
Interest rates are the cost of borrowing money or the return earned on savings, expressed as a percentage of the principal amount. They play a crucial role in the economy by influencing consumer spending, investment, and overall economic activity. For borrowers, interest rates determine how much extra they will pay for loans such as mortgages, car loans, and credit cards. For savers, they indicate the earnings they can expect from deposits in savings accounts or fixed-income investments.
Who Sets Interest Rates?
Interest rates are primarily set by central banks, such as the Federal Reserve in the United States, the European Central Bank, or the Bank of England. These institutions use interest rates as a tool to manage monetary policy, aiming to achieve goals like stable inflation, economic growth, and low unemployment. Central banks establish a benchmark rate, such as the federal funds rate in the U.S., which influences the rates that commercial banks charge each other for short-term loans. In turn, this affects the interest rates consumers and businesses experience.
Why Do Interest Rates Go Up And Down?
Interest rates fluctuate based on economic conditions and central bank decisions. When inflation rises too quickly, central banks often increase interest rates to reduce spending and borrowing, cooling down the economy. Conversely, during economic slowdowns or recessions, they may lower rates to encourage borrowing, spending, and investment, stimulating growth. Additionally, market forces, global economic trends, and government fiscal policies can impact the direction and magnitude of interest rate changes. By adjusting rates, central banks aim to maintain economic stability and ensure sustainable growth.
Interest rates are the cost of borrowing money or the return earned on savings, expressed as a percentage of the principal amount. They play a crucial role in the economy by influencing consumer spending, investment, and overall economic activity. For borrowers, interest rates determine how much extra they will pay for loans such as mortgages, car loans, and credit cards. For savers, they indicate the earnings they can expect from deposits in savings accounts or fixed-income investments.
Who Sets Interest Rates?
Interest rates are primarily set by central banks, such as the Federal Reserve in the United States, the European Central Bank, or the Bank of England. These institutions use interest rates as a tool to manage monetary policy, aiming to achieve goals like stable inflation, economic growth, and low unemployment. Central banks establish a benchmark rate, such as the federal funds rate in the U.S., which influences the rates that commercial banks charge each other for short-term loans. In turn, this affects the interest rates consumers and businesses experience.
Why Do Interest Rates Go Up And Down?
Interest rates fluctuate based on economic conditions and central bank decisions. When inflation rises too quickly, central banks often increase interest rates to reduce spending and borrowing, cooling down the economy. Conversely, during economic slowdowns or recessions, they may lower rates to encourage borrowing, spending, and investment, stimulating growth. Additionally, market forces, global economic trends, and government fiscal policies can impact the direction and magnitude of interest rate changes. By adjusting rates, central banks aim to maintain economic stability and ensure sustainable growth.
How Do Interest Rates Affect Banks? (YOU Borrow From Banks To Get A Mortgage)
Interest rates significantly impact banks' operations and profitability, primarily through their influence on lending and deposit activities. When interest rates are high, banks can charge more for loans, such as mortgages, personal loans, and business financing, which can increase their interest income. At the same time, they typically offer higher rates to depositors, which can attract more deposits. This spread between the interest earned on loans and the interest paid on deposits, known as the net interest margin, is a key driver of a bank's profitability.
However, when interest rates are low, banks may struggle to maintain high net interest margins. While borrowing costs for customers decrease, encouraging higher loan demand, the returns on fixed-income investments and savings accounts also drop, compressing the margins banks earn. This environment can pressure banks to explore alternative revenue streams, such as fees for services or increased reliance on non-interest income sources, like investment banking and wealth management services.
Interest rate changes also affect banks' overall risk and financial stability. Rapid increases in interest rates can lead to loan defaults, as borrowers may find it harder to meet their obligations. Conversely, prolonged periods of low rates can encourage excessive borrowing and risk-taking, potentially leading to asset bubbles or defaults during economic downturns. Additionally, banks must carefully manage the maturity mismatches between their assets (loans) and liabilities (deposits), as fluctuations in interest rates can create challenges in maintaining liquidity and profitability. Thus, interest rate dynamics play a critical role in shaping banks' strategies and performance.
Interest rates significantly impact banks' operations and profitability, primarily through their influence on lending and deposit activities. When interest rates are high, banks can charge more for loans, such as mortgages, personal loans, and business financing, which can increase their interest income. At the same time, they typically offer higher rates to depositors, which can attract more deposits. This spread between the interest earned on loans and the interest paid on deposits, known as the net interest margin, is a key driver of a bank's profitability.
However, when interest rates are low, banks may struggle to maintain high net interest margins. While borrowing costs for customers decrease, encouraging higher loan demand, the returns on fixed-income investments and savings accounts also drop, compressing the margins banks earn. This environment can pressure banks to explore alternative revenue streams, such as fees for services or increased reliance on non-interest income sources, like investment banking and wealth management services.
Interest rate changes also affect banks' overall risk and financial stability. Rapid increases in interest rates can lead to loan defaults, as borrowers may find it harder to meet their obligations. Conversely, prolonged periods of low rates can encourage excessive borrowing and risk-taking, potentially leading to asset bubbles or defaults during economic downturns. Additionally, banks must carefully manage the maturity mismatches between their assets (loans) and liabilities (deposits), as fluctuations in interest rates can create challenges in maintaining liquidity and profitability. Thus, interest rate dynamics play a critical role in shaping banks' strategies and performance.
What is the relationship between housing prices and interest rates?
The relationship between housing prices and interest rates is predominantly inverse, as changes in interest rates directly affect mortgage affordability and, consequently, housing demand. When interest rates are low, borrowing becomes cheaper, allowing buyers to afford larger loans with the same income. This increased purchasing power often drives up housing demand, leading to higher prices. Conversely, when interest rates rise, the cost of borrowing increases, reducing buyers’ purchasing power and cooling demand, which can put downward pressure on housing prices.
Interest rates also influence investor behavior and market sentiment. Low interest rates encourage real estate investment by lowering financing costs and increasing the potential return on investment. This can lead to heightened competition for properties, further driving up prices. On the other hand, high interest rates reduce investor activity as financing becomes less profitable. Moreover, higher rates often create uncertainty and caution among buyers, leading to fewer transactions and a stabilization or decline in prices.
However, the relationship is not always straightforward, as other factors like housing supply, economic conditions, employment rates, and government policies also play significant roles in determining housing prices. In markets with limited housing supply or strong economic growth, prices may remain high despite rising interest rates. Conversely, during economic downturns, even low interest rates may fail to stimulate demand if consumers lack confidence or financial stability. Thus, while interest rates are a key determinant of housing prices, they interact with a complex web of other market forces.
The relationship between housing prices and interest rates is predominantly inverse, as changes in interest rates directly affect mortgage affordability and, consequently, housing demand. When interest rates are low, borrowing becomes cheaper, allowing buyers to afford larger loans with the same income. This increased purchasing power often drives up housing demand, leading to higher prices. Conversely, when interest rates rise, the cost of borrowing increases, reducing buyers’ purchasing power and cooling demand, which can put downward pressure on housing prices.
Interest rates also influence investor behavior and market sentiment. Low interest rates encourage real estate investment by lowering financing costs and increasing the potential return on investment. This can lead to heightened competition for properties, further driving up prices. On the other hand, high interest rates reduce investor activity as financing becomes less profitable. Moreover, higher rates often create uncertainty and caution among buyers, leading to fewer transactions and a stabilization or decline in prices.
However, the relationship is not always straightforward, as other factors like housing supply, economic conditions, employment rates, and government policies also play significant roles in determining housing prices. In markets with limited housing supply or strong economic growth, prices may remain high despite rising interest rates. Conversely, during economic downturns, even low interest rates may fail to stimulate demand if consumers lack confidence or financial stability. Thus, while interest rates are a key determinant of housing prices, they interact with a complex web of other market forces.
How To Figure Out How Much A House REALLY Costs You.
About This Video: In this video lesson, Mr. Kazanjian introduces a loan calculator to help students understand how much they will actually pay when borrowing money, using real estate scenarios from Hemstead, New York. The lesson emphasizes the importance of homeownership over renting to build wealth. Mr. Kazanjian demonstrates how to calculate the amount to borrow by subtracting a down payment of $50,000 from a house priced at $399,900, resulting in a loan amount of $349,900. Current interest rates are discussed, highlighting the high rates at 7.86% for a 30-year mortgage and 6.88% for a 15-year mortgage. Mr. Kazanjian shows how to compute monthly payments and total payments over the life of the loan, revealing that while the monthly payment for a 15-year mortgage is higher, it results in significantly less paid in interest overall. Students are encouraged to complete additional calculations on their own based on the provided scenarios.
OOPS!!! I FORGOT SOMETHING!!!!!
In the video above, I forgot the calculation of adding the down payment to the principal and interest!
LINK TO LOAN CALCULATOR---------> |