What Factors Influence Mortgage Interest Rates?
There are a few really important numbers when it’s time to obtain a home loan: your credit score, the amount you want to borrow, and the interest rate. The news is full of talk about interest rates lately. Will they go up? Will they go down? Will they stay down? When they go up, how far will they go?
It’s a losing battle to follow the news on mortgage interest rates on a daily basis if you’re hoping to lock in the best possible loan rate. However, you can certainly get a sense of key trends by keeping your eyes and ears open when it comes to the 10-year Treasury, Federal Reserve, and mortgage interest rates.
Before you do that, you’ll want to make sure you understand what factors influence mortgage rates.
Economic Health & Supply and Demand
The overall economy affects mortgage rates. When the gross domestic product (or GDP) and employment rise, it’s a sign of a growing economy, so there is a greater demand for goods and services, including real estate. A growing economy creates competition from those wishing to borrow money. This demand causes interest rates to rise.
The opposite is true in a slowing economy. When demand falls, interest rates tend to go down.
In terms of home loans, the “supply” is the money (or credit) available to lend. A high demand for mortgages means banks have less money to lend; therefore, the cost of a loan goes up via higher interest rates.
This also means that when there is more money to lend, or an increase in the supply of credit, the cost of borrowing goes down in the form of reduced interest rates.
Another factor is how other debts impact a bank’s ability to lend money. For example, a missed credit card payment or mortgage payment will reduce the amount of credit available in the market. When the credit supply tightens, that creates higher interest rates.
Everyone is affected by inflation. You, your mom, your dry cleaner, and even your bank.
Inflation occurs when the money supply used to purchase products exceeds the products available for purchase. The bigger