Understanding Rates: How They Affect Your Loan

When considering a loan, understanding rates is essential. Rates can have a significant impact on the cost and terms of your loan, and they are constantly changing. Just try inputting different rates in any of our mortgage or loan calculators. In this blog post, we’ll explain everything you need to know about loan rates, including what they are, how they affect your loan, and why they change.
 
It’s important to remember that while the rates we’re seeing today may seem high in compared to recent years, they’re actually quite low when viewed in the larger scheme of economic reality. For example, the average rate for a conventional 30-year mortgage in 1984 was 13.87% according ot the U.S. Department of Housing and Urban Development. That's almost hard to fathom today. With an informed understanding of loans and rates, you can make the decision that is right for you and your financial future.
 

What Are Rates?

When it comes to loans, rates dictate the amount of interest you pay to borrow money from the bank. Rates determine the monthly payment on your loan and the total cost of borrowing over time. For example, if you take out a $200,000 loan with a 7% rate, your monthly payment will be about $1,500, and you’ll pay around around $171,000 in interest over the 20-year the life of the loan.* No matter what type of loan you choose, it’s important to compare rates in order to get the best deal. The difference between a few tenths of a percentage point on your loan may add up to thousands of dollars over the life of the loan. Your personal banker or mortgage lender should be able to provide specifics on how different loan rates would impact your monthly payment and total interest costs over the life of the loan.
 

How Do Rates Impact Your Loan?

When taking out a loan, one important factor to consider is the interest rate. Interest rates play a huge role in determining the amount of money you’ll have to pay back over the life of your loan, but it’s important to remember that the rate you get when you apply for a loan is only part of the equation. The other factors that play a role in determining the cost of your loan include the:

• Loan term - the amount of time it will take to pay off the loan (for example, a certain number of years).
• Loan type - the are two main types. 
  • Fixed rate loans have rates that stay the same.
  • Adjustable rate loans have rates that change.
• Fees - there are different fees that may apply depending on the type of loan.
• Your credit score - a rating of how likely it is you'll be able to pay back the loan based on several factors. You can learn more about credit scores by reading these FAQs.

Interest rates represent the amount of money you’ll be paying back on top of the principal loan amount. Generally speaking, the higher the interest rate, the higher your monthly payments will be. However, this isn’t always the case; if you opt for a longer-term loan, a lower interest rate could still end up costing you more in the long run due to interest accrued over time. That's why it's important to talk to a banker who can run all the different scenarios for you.

Particularly for home loans, the fees associated can also impact your rate, and therefore impact the costs you pay over time. You may choose to pay fees upfront and receive a lower long-term rate or choose a higher rate upfront with low to no fees associated. It's all about finding the option that you're most comfortable with.

Your credit score may also impact what rate you’re offered. A higher credit score usually means a lower rate, which may potentially save you money in the long run. Lenders may also be willing to negotiate rates based on your particular circumstances. If your credit score is lower than you'd like it to be, lenders can also provide education on tactics you can use to improve your score and potentially help you qualify for better rates.
 
It’s important to consider all these factors when deciding on a loan – not just the initial rate you are offered. Understanding all the associated costs can help ensure you get the best deal possible.
 

Why Do Rates Change?

Rates are often subject to fluctuations due to the changing economic environment. For example, when the economy is doing well and there’s a surplus of money available for lending, rates tend to go down. When the economy is in a recession, however, lenders are more cautious and therefore tend to raise their rates. 

The Federal Reserve (the Fed) is constantly watching inflation and reacting to changes in the economy. If the inflation rate rises, the Fed may raise its rates in order to prevent prices from becoming too high. This in turn affects the cost of money for lending markets, so lenders may then raise their loan rates in response, as most banks follow the Fed’s recommendations for setting rates. Mortgage rates (you can check current ones on our Rates page), in particular, are highly influenced by the Fed's decisions, making it important to pay attention to the news and current events. 

Other factors such as the creditworthiness of borrowers and the level of competition among lenders may also affect rates. A borrower with a good credit score might be more likely to get lower rates than one with a lower credit score since lenders see them as less of a risk. Similarly, if there are many lenders in an area vying for the same borrower’s business, they may offer lower rates in order to attract them.

In summary, loan rates are constantly changing based on macroeconomic factors, creditworthiness, competition among lenders, and inflation levels. While this can make it difficult for borrowers to plan ahead, understanding why rates change can help them make more informed decisions about their finances.