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What Influences Mortgage Rates?

April15
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Mortgage interest rate is one of the major concerns for those who are planning to apply for a mortgage loan. As the amount of a mortgage loan is usually very large, most people prefer to have a lower interest rate on their mortgage. This can help them save thousands of dollars during the entire term of their mortgage. Mortgage rates are influenced by many factors. Some of the key influencing factors are:

Time Period

Mortgage loans are investments that stretch over a long span of time. Due to this, the interest rates of a mortgage loan continuously change along with changes in the interest rates of other long-standing investments. On average, a mortgage is typically paid off in a matter of 10 years. This is because the homeowner moves or opts for a refinance. In both situations, the mortgage is paid off before it’s due.

A 10-year Treasury bond has an almost similar time frame for repayment as that of mortgage loans. Therefore, it is highly comparable to a mortgage and is considered as a benchmark for the interest rates of a mortgage loan.

Economic Growth

When the economy is in boom, it will generate greater employment opportunities, higher levels of income, greater consumer spending and increased investments. The positive growth in the economy encourages potential homeowners to invest in the real estate market. This increases the demand for mortgage loans, as a result. As the funds available for lending are every limited, the interest rates of mortgages shoot up to cope with the growing demand.

The scenario reciprocates during slow economic growth. The homeowners have lower incomes and less investment and spending capability. They find it difficult to be able to buy a home. This results in a limited supply of prospective homeowners. The demand for mortgage loans also decreases, driving the mortgage rates down.

Inflation

Inflation occurs when the prices of goods and services in the economy rise over a period of time. This tends to decrease the affordability and purchasing power of the people. As a result, the demand for mortgage loans as well the profit earned by lenders decreases. To compensate for the loss, mortgage lenders raise the interest rates. So, overall inflation in the economy influences the mortgage rates substantially as lenders try to earn a stable income without compromising on their profits under inflation as well.

Monetary Policy

One of the key factors that influence mortgage rates is the Federal Reserve. This is the main banking authority of the country. The Fed does not determine the interest rates or influences them directly. However, it does have an indirect influence on the interest rates. This is because the Fed is responsible for altering the flow of money supply in the economy to accomplish particular goals.

So, when the Federal Reserve intends to increase the supply of money in the open market, the interest rates decline. The opposite happens when the money supply in the economy decreases. This makes time a very crucial factor for potential home buyers.

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