For some time now, mortgage rates have been at or very near record lows. The low interest rates have encouraged many first time buyers to purchase and many people who already have mortgages to refinance to get a better rate. While people might take advantage of low rates, the question lingers: what’s the cause of change in mortgage rates? As it turns out, a number of factors are behind the ups and downs of mortgage interest rates, including factors you can and can’t control.
Supply, demand, inflation
Supply and demand is a typical cause of change in mortgage rates. A very simple way to explain how supply and demand impacts rates is to say that when there’s an ample supply of money to be loaned, but not much demand for that money, rates drop. But, when everyone wants to borrow to buy a home, demand goes up, but the supply of money decreases, meaning rates go up.
Several forces impact the supply side of things. When more people deposit money into a bank account, supply goes up, so banks often lower interest rates. Another factor that affects supply is how fast you can pay off your loans. The longer it takes a person to pay back a mortgage, usually the higher the rate.
Inflation can also influence mortgage rates. A dollar today doesn’t have the same value as a dollar in 1970 or a dollar 20 years from now. If a lender is worried that the value of a dollar will drop over the life of a mortgage, it’s likely that you’ll be given a higher rate, so that the lender will still make some profit on the loan, even when its value decreases.
The government, or more specifically, the Federal Reserve, can often intervene and influence interest rates. According to Investopedia, it does so through a process called quantitative easing, during which it buys bonds and securities. Doing so increases supply, as banks and lenders will have an excess of cash to lend and in turn can push down their rates.
Your personal story
The other factor that determines interest rates on a mortgage is you. Even when rates are incredibly low, if you don’t meet certain requirements, you might be given a higher, less desirable rate. Just as lenders raise rates to protect themselves against the risk of inflation, they also increase rates to protect themselves against a borrower who might be more likely not to pay back the loan. Your credit score plays a part here, as does the length of the mortgage and the amount of the mortgage. Larger than average mortgages, called jumbo loans, usually have higher rates, for example.
If you want the best rate on a mortgage, timing is important. You want to get in before rates go up. But your personal history and the size and term of the loan will also play a part in determining the amount of interest you have to pay.
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