If you are shopping for a mortgage, you may have noticed that rates can fluctuate from one week to the next. Small increases can add up quickly, depending on the amount of your loan. What makes mortgage rates fluctuate? There are a number of factors.
The Federal Reserve
The Federal Reserve can make adjustments to the U.S. economy by raising or lowering the federal funds rate, which is the interest rate banks charge each other for short-term loans. This, in turn, increases the interest rates of corporate bonds and mortgages, which ripples down the lending chain to change the interest rates of consumer loans. The reason the Fed changes the interest rate is to control inflation and avoid recessions. If credit is to readily available, it will drive up the price of goods and lower the buying power of the dollar (inflation), but if credit is too difficult to obtain, it can create a recession. Controlling the interest rate is one way that the Fed keeps the economy balanced.
In addition to controlling interest rates, the Federal Reserve can also adjust the supply of money. If economic growth is causing too much inflation, purchasing power is put at-risk. To prevent the devaluing of the dollar, the Fed will buy a predetermined amount of Treasury bonds on the open market, which will put more money into the economy. This will decrease interest rates and prevent dangerous inflation, which will, in turn, lower mortgage rates.
The health of the economy overall is another factor that influences mortgage rates. When interest rates are low, businesses expand and hire more employees. When more people are working, they are also buying more goods, including houses. So if the economy is booming, mortgage lenders will increase their rates.
However, as interest rates rise, businesses spend less, which can include slowing hiring or laying-off employees. If people lose work, they may stop spending and put off purchasing a home. Sales will slow, and mortgage brokers will lower their rates.
Mortgage lenders study conditions to determine how the economy will perform in the short- and long-term. Experts turn to the Consumer Price Index, Consumer Confidence, Gross Domestic Product, Home Sales, and other factors to predict what the future will bring. They also examine how interest rates will affect spending. If continued economic growth is expected, lenders will increase their mortgage rates to keep up with inflation. On the other hand, if an economic decline is on the horizon, mortgage rates will decrease.
It is not just the state of the U.S. economy that determines mortgage rates. Political unrest, foreign competition, fuel and food costs, and any other factors that can help or hinder the U.S. economy can influence mortgage rates.
Supply and Demand
Mortgage lenders closely monitor the real estate industry to determine what the demand will be for mortgages. If the construction and sale of new homes is on the rise, lenders can expect a greater demand for mortgages and may increase rates accordingly. If new construction and sales are on a decline, interest rates could decrease as well.
This is a complicated topic, but because mortgage rates can either save you or cost you a great deal of money in the long-term, it is important to take the temperature of the economic climate when you are considering applying for a home loan. If you can correctly time when you purchase or refinance your home, you can save yourself on interest costs.