What Is Interest Rates?
Interest rates are what lenders charge you to use their money. On a mortgage, the rate determines your monthly payment. A $250,000 loan at 6% for 30 years runs about $1,499/month. At 7.5%, it's $1,748—that's $249 more every month, $89,640 over the life of the loan. Rates move with the Fed, inflation, and market demand. When they're low, refinancing makes sense. When they're high, cash flow gets squeezed and cap rates often rise (property values adjust). For investors, the rate isn't just a number—it's the difference between a deal that pencils and one that doesn't. A 50-basis-point move (0.5%) on a $300,000 loan changes your payment by roughly $90/month. That's real money.
The cost of borrowing money—expressed as an annual percentage. You pay it on top of principal. Lower rates mean lower payments; higher rates mean you're paying more to the lender.
At a Glance
- What it is: The annual cost of borrowing—expressed as a percentage of the principal.
- Why it matters: Directly drives your mortgage payment. A 1% rate drop on a $200K loan saves ~$120/month.
- What moves them: Fed policy, inflation, bond market, lender competition.
- Investor impact: Lower rates = more affordable leverage. Higher rates = tighter cash flow, often lower property values (cap rate expansion).
How It Works
You borrow $200,000 at 7% for 30 years. The lender doesn't just want their $200,000 back—they want to be paid for the risk and the time value of money. The 7% is the interest rate. Each month, part of your payment goes to interest (the lender's cut) and part to principal (paying down the loan). Early in amortization, most of the payment is interest. Over time, the balance shifts toward principal.
Fixed vs variable. A fixed-rate mortgage locks the rate for the life of the loan. Your payment never changes. A variable-rate loan (common with HELOCs and some bridge products) ties to an index—usually prime or SOFR. When that index moves, your rate moves. In a rising-rate environment, variable loans get more expensive. In a falling environment, they get cheaper.
What drives rates. The Fed sets the federal funds rate—what banks charge each other for overnight loans. That trickles through to mortgage rates, though the link isn't 1:1. Mortgage rates also track the 10-year Treasury. Inflation expectations matter: when the market expects higher inflation, rates rise. Lender competition matters: when banks want your business, they sharpen their pricing.
Real-World Example
Memphis duplex, two rate environments. Same property: $180,000 purchase, $144,000 loan (80% LTV), 30-year term.
2021 (rates ~3.5%): Payment: $647/month. NOI after expenses: $1,100. Cash flow: $453/month. Cash-on-cash return: 11.3%.
2024 (rates ~7.25%): Payment: $982/month. Same NOI: $1,100. Cash flow: $118/month. Cash-on-cash return: 2.9%.
Same property. Same rent. The rate move from 3.5% to 7.25% cut your cash flow by 74%. That's why rate environment matters. Deals that worked at 3.5% often don't at 7.25%—unless you're buying at a steeper discount or the cap rate has expanded enough to offset the higher payment.
Pros & Cons
- Lower rates = lower payments = more cash flow and higher ROI.
- Fixed rates lock in predictability—you know your payment for 30 years.
- Rate drops create refinance opportunities—lower your payment without selling.
- In low-rate environments, leverage is cheaper—you can control more property with less interest cost.
- Higher rates squeeze cash flow—same rent, bigger payment.
- Rising rates often push cap rates up—property values can drop even if NOI stays flat.
- Variable rates add uncertainty—your payment can rise when you least expect it.
- Refinancing in a high-rate environment rarely makes sense—you're stuck with your current loan.
Watch Out
- Modeling risk: Don't underwrite at today's rate and assume it holds. If you're buying with a 7% loan, model at 8% or 8.5%. If rates rise and you're barely cash flowing, you've got no cushion for vacancy, repairs, or a big capital expense.
- Execution risk: Lock your rate when you have a contract. Rates can move 50 bps in a week. A "float" (no lock) means you're at the market's mercy. If you're 30 days from closing and rates spike, your payment could jump $150/month. Lock as soon as the deal is solid.
- Exit risk: In a BRRRR, you're counting on a refinance at 6–12 months. If rates have risen, the refi payment may be higher than you modeled—and your DSCR might not qualify. Have a backup: extend the hard money, or hold more reserves to cover a higher payment until you can refi at a better time.
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The Takeaway
Interest rates are the cost of borrowing. They drive your mortgage payment, your cash flow, and whether a deal pencils. A 1% move on a $250,000 loan changes your payment by roughly $150/month. Model conservatively—underwrite at 0.5–1% above today's rate. Lock when you have a contract. And when rates drop, run the refinance math. Sometimes the savings justify the closing costs. Sometimes they don't. But you'll never know if you don't run the numbers.