Only a small percent of the American population has the saved up or on hand capitol to purchase a home without taking out a loan or financing it in some way. When a borrower takes out a loan from a lender, the lender will want to be compensated for the risk and loss of on hand money through interest. Interest rates vary considerably for many reasons. But as already stated, the bottom line is that when a lender lends money to a borrower, they no longer have the money they gave out on hand to use for other things that will bring some sort of benefit. The lender needs to assume another form of benefit or compensation for that loss so they charge interest.

Interest is unique in that it is different for every situation. Interest represents a number of factors. If a lender really likes having a lot of money on hand, then the loss of the on hand money will be a real burden to them and they will need to charge more to compensate for that burden. They will compensate by asking a higher interest rate. An example may be the famous rich uncle. It seems in almost all families there is one relative that has struck it rich and lives with the never ending nagging problem of everyone and their dog asking for money. Lets say this particular uncle likes his money a whole lot though and only lends out the money and expects real repayment. Because he likes his money so much, he charges an extremely high interest rate of twenty percent. So if you really need to have cash quick for the humanitarian trip to Africa and your rich uncle gives you one hundred dollars, he will want one hundred and twenty dollars at the repayment period as his interest for not having the money on hand.

Another unique quality of interest rates is that interest is a hedge for risk. The more risky the venture, the higher the payment for the loan will need to be. To illustrate this, think of the difference between buying a bond in lets say Walmart, and buying a bond in an upstart company selling a new concept of laser watches. Walmart is well established and the investor pretty much knows that they will get the money back from the loan so they can charge Walmart less to borrow money. The laser watch company on the other hand has not proven their value in anyway and cannot be trusted to succeed. The bond for the laser company should be a whole lot higher to compensate for the added risk.

Both of these uses of interest rates become apparent when buying a home. Mortgages usually are offered in either a fifteen-year or thirty year periods. Given the preference for having money in ones hands, the thirty-year period is going to be charged a higher interest. A lender will not have the money they lended back into their hands for thirty years so they will want that extended period of time compensated for.

Also, different loans are made off of different down payments. The higher the down payment, the less risky the borrower is because of the more they have invested in the home. So the more money a buyer fronts the less risky they are and the less interest they will need to be charged.

Author Bio: Juhlin Youlien writes about Paradise Valley AZ homes for sale and Fountain Hills AZ homes for sale.

Category: Real Estate
Keywords: homes for sale, real estate, buying a home, selling a home, loan, mortgage, foreclosurehomes for sal