Mortgage rates are always fluctuating. The rate you could get last month may not be the same as the rate you can get this month. Mortgage borrowers want the best possible rates, but there are many factors that influence what the interest rate will be, which determines the total cost of the mortgage over its lifetime.
The factors that can influence mortgage rates locally and nationally include the mortgage lender’s degree of risk, the creditworthiness of the borrower, and the market. Each one of these has different factors that influence them, which are outlined below.
1. The Economy
The condition of the economy has an influence on several factors. One of those is inflation. Inflation can weaken the lender’s lending power, which causes the lender to have to establish an interest rate that helps them battle the hit that their lending power takes. They have to ensure the interest produces a profit for them. For example, the mortgage rate may be 4% with annual inflation at 2%. This means the mortgage’s real return is just 2%.
2. Condition of the Housing Market
If the housing market isn’t in good condition, demand tends to be low. When demand is low, interest rates are forced down. When the market is in great shape and demand is high, interest rates tend to increase. High consumer demand in a specific area where there is low home availability can also cause the rate to increase.
3. Number of Foreclosures
A lender can lose lending power if they have a high rate of foreclosures. The individual lender may need to adjust their rates to offset losses. They also lose lending power, which means they have to be stricter with their rates and who they lend to. These factors can influence why one lender has a higher rate than the lender down the street.
4. The Fed Funds Rate
The Federal Reserve doesn’t set the rates for mortgages, but adjustments to the money supply affect how much money is available. If the money supply is increased, interest rates go down. If the money supply is decreased, the rates increase.
5. Mortgage-Backed Securities
Mortgage-backed securities are marketed by banks and investment firms as investment instruments. These are called “debt securities,” and the yields have to be high so people will invest in them. The yields that are offered on mortgage-backed securities are affected by government and corporate bonds because the two investment products compete against one another. This means that the large bond market has an indirect impact on mortgage rates because the lenders have to make sure the mortgage-backed securities have sufficient yields to make them attractive.
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