What Factors Affect Mortgage Interest Rates?
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Mortgage interest rates can add, or subtract, many thousands of dollars to the price of your home. Interest rates affect our planning as we think about that big move. Rates low? Buy now! Rates high? Better wait until… what exactly?
Mortgage loan rates were brought low by the Big Recession. They stayed low during a not-so-great recovery. Now, even as the recovery begins to show new vigor, interest rates are STILL relatively low. But they may not stay that way long.
What factors affect mortgage interest rates? Why do rates rise and fall? There are two types of forces at work: Macro forces, such as the economy, the housing market, etc.; and Micro forces, which are the ways YOU interact with the mortgage process.
Let’s take a look at both the Big and Small picture of mortgage interest rates, starting with Macro forces, as described by Investopedia:
Inflation chips away at buying power. It takes more money to buy things, and that includes borrowing money. As the value of money decreases due to inflation, mortgage interest rates go up to make it worth the lender’s time to make that loan. Lenders watch inflation very closely!
Specifically, the Gross Domestic Product (GDP) and the unemployment rate. More productivity and lower unemployment drives up demand and buying power. And there is only so much money to loan. More people pursuing fewer resources drives up the price of things, including mortgage interest rates. Lower productivity and higher unemployment means lower interest rates.
Same principle: more money available makes it cheaper (lower rates). Less money makes it more expensive (higher rates). A primary function of “The Fed” is to loosen or tighten the available money supply.
This is a little complex, but it’s one of the biggest factors affecting mortgage interest rates. One big way that banks and lending institutions attract investors is by offering Mortgage Backed Securities (MBS). Investors want high yields, the kind that high interest rates bring. At the same time, the banks are competing with government Treasury bonds for those same investors. Being the government, Treasuries have the power to set the bar of competition. Treasuries sit at a certain interest rate, with Lender securities a couple of points higher. Private securities have to offer investors bigger gains to offset their risk, because Treasury returns are guaranteed while private securities aren’t. Basically, if Treasury rates are low, then mortgage rates are also low, which is the state of things right now.
Much simpler! If fewer homes are being built or resold, demand for mortgage loans decreases, and rates drop.
That’s the rundown of Macro factors that affect mortgage loan rates. The details may be a little hard to follow, but one takeaway is that, however it works, rates are still low. Will they stay that way? History says maybe not. So take advantage of low rates, and contact New South Mortgage, Charleston’s trusted name for nearly 20 years!
Next time: the things YOU do to affect mortgage loan rates!