Interest can be described as a cost that is incurred when money is borrowed. The word Interest in the area of real estate (or loans) refers to the value of time use of money or assets belonging to a person. Interest, when used in the context of a real estate transaction, ordinarily is a dollar fee paid by one who is loaned money. When a loan is made to a borrower, Interest is paid to the lender based upon a percentage of the total amount loaned known as the principal amount. The principal’s percentage that is paid over a period of time as the fee for the use of money is called the Interest rate. Typical examples of Interest in a real estate transaction occur when a buyer purchases property and takes out a loan to assist in the acquisition. Usually a financial institution loans the buyer a set sum of money (principal) for a specified period of time with monthly payments at a set interest rate. Interest is compensation for the lender who foregoes other investments that he or she could have made with the loaned asset. Additionally, Interest compensates for the risk of loss on the loaned asset commonly known as credit risk. Typically in real estate matters, Interest is known as the price paid for credit to a borrower. A borrower with good credit can expect to pay lower Interest rates than a borrower with bad credit on most loans.

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