What Impacts Mortgage Interest Rates?
Mortgage interest rates are incredibly important for all of us as they impact long-term home purchasing as financing is needed. Mortgage borrowers often seek really low rates but mortgage lenders really need to manage risk. There is a constant back-and-forth going on. Really low mortgage interest rates can only become available in the event the borrower has really good credit history and solid finances.
Obviously, there are some things that you know will have an impact on mortgage interest rates. For instance, everyone knows that payday loans go on the credit report so when you do not repay them in time, future lenders can end up considering you to be a high-risk client. However, other things might not be known. This is what we will focus on.
If you want to reduce mortgage interest rates, you first need to be aware of what impacts them.
Mortgage lenders always analyze inflation. This is because inflation has an impact on the currency’s buying power. Interest rates need to be maintained at levels that are high enough to overcome inflation purchasing power erosion. Real net profit is needed so inflation is always considered.
As a simple example, when mortgage rate is 5% but annual inflation is 2%, the loan’s return based on currency purchasing power is just 3%.
Economic Growth Level
Economic growth indicators like GDP influence mortgage rates. Employment rate also has an impact. IF there are really high economic growth levels, consumer spending is higher since income is higher. Simply put, if economic growth level is high, there are more people that take out mortgages. Most people think that this is going to reduce mortgage interest rate but the exact opposite happens since lenders have only limited funding available. They need to make more profit faster in order to get more clients.
If economy is weaker, home loan demand is lower. Interest rates go down as a result.
The Bond Market
Investment firms and banks are marketing MBSs (mortgage-backed securities) as an available investment product. Yields coming from the debt securities have to be as high as necessary in order to attract a buyer. Corporate bonds and governments offer fixed income investments that are long-term and compete with MBSs. Because of this, the bond market affects mortgage lender charges in an indirect way. Lenders need to generate yields that are high enough for the MBSs to become competitive.
Monetary Policy Of The Federal Reserve
The Federal Reserve Bank’s monetary policy is a really important factor that influences interest rates and the economy. The actions of the Federal Reserve in establishing Fed Funds rates impact rates. Generally, when money supply is increased, the rate’s pressure is downward. Tightening money supplies will add upward pressure.
The Conditions Of The Housing Market
Housing market conditions and trends always affect mortgage rates. If there are fewer homes that are offered for resale or that are built, mortgage demand is lower while interest rates are pressured to go down. If downward pressure appears, there are more consumers that want to rent instead of buying. Home availability or consumer demand changes will affect the loan rates set by mortgage lenders.
When trying to predict mortgage rates, the basic supply and demand rules apply. Factors like economic growth, inflation, the housing markets, bonds and the monetary policy of the government will all have an influence. Obviously, the financial health of the individual also affects interest rates. Always be sure you do all that you can in order to control your finances when you know you will need a mortgage loan. While you cannot influence the factors mentioned above, your financial choices do play a part.