What is an interest rate?

An interest rate is defined as the cost of borrowing money, expressed as a percentage of the loan amount. This percentage indicates how much a borrower will need to pay in addition to the principal (the original amount borrowed) over a specified period, typically annually. Interest rates are crucial in determining the total cost of a loan and affect how much borrowers will pay per month in terms of principal and interest payments.

Understanding interest rates is fundamental for homebuyers and anyone looking to finance a major purchase because it influences their overall financial responsibility. A higher interest rate results in higher costs over the life of the loan, while a lower rate can save borrowers significant amounts over time.

The other options do not accurately define an interest rate. While taxes on real estate transactions and fees for processing a loan are related to finance, they are separate costs that do not resemble the concept of an interest rate. The total amount of money borrowed refers to the principal and does not encapsulate the additional cost incurred by borrowing, which is what the interest rate represents.