What Factors Affect Mortgage Interest Rates?
Mortgages are very common for people looking to buy a home. If you are considering buying a home in Massachusetts or any other state, you will be looking for mortgages, but may be worried about the mortgage interest rates. Many of us do not know what impacts the interest rates of mortgages. There are many factors that can affect mortgage and financing interest rates like the economy, Federal Reserve, mortgage bonds, and inflation. These determining factors are discussed below.
These are bundles of mortgages that are sold in the bond market and can affect mortgage rates depending on their demand. Investment banks sell mortgage bonds after buying mortgages from lenders. These bonds are long term and the yield comes from the principal amount and the interest. If investors need more mortgage bonds, the prices will increase and the mortgage rates will go down.
Mortgage interest rates vary based on how the economy is doing and its outlook. When the economy is good, that is, when the unemployment rates are low and the spending is high, mortgage interest rates will be high.
When the economy is bad, it is usually good for the consumer. You might not forget the times when the pandemic hit the economy. The economy went downhill during these times and the rates of interest were very low. This raised the number of borrowers buying new homes and refinancing existing homes. In the opinion of many real estate experts, many refinances were just to reduce the interest rates or to take out cash to combine credit card debts, for home improvement projects, etc.
Inflation and mortgage rates go hand in hand. With an increase in inflation, interest rates increase. Inflation weakens the dollar and lenders will be forced to raise interest rates. If inflation is expected to last for a while, it can affect mortgage rates and this is what we are presently experiencing.
The Federal Reserve
Federal reserve meetings are held about eight times per year to decide whether to increase or decrease the federal funds rate. These determinations are typically guided by inflation and unemployment rates. It is the federal rate that commercial banks make use of to lend and borrow from each other. After deciding on the rate, this goes to short-term loans and the mortgage rates will not typically be affected. Sometimes, the mortgage rates can be affected, but the previous factors discussed will also be taken into account.