Factors That Influence Mortgage Rates
A mortgage is the preferred financing option for homebuyers when they choose to buy a house. The mortgage rates that a borrower may receive are influenced by a variety of factors. For instance, they are subject to fluctuating government policies and economic factors which is why they are in a state of constant change.
Mortgage rates have a long-term impact on the overall cost a borrower will make. So, understanding the factors that determine mortgage interest rates can help you prepare for the process of buying a home. Below are some factors you should take note of:
- Inflation – A gradual increase in prices is referred to as inflation. It significantly impacts the economy of a nation and reduces the purchasing power of the dollar over time. Mortgage rates are highly sensitive to inflationary factors. So, when inflation increases, mortgage rates rise and vice versa. This subsequent rise in rates protects the profits of the mortgage lender in the long run.
- Unemployment – Mortgage rates are also influenced by the level of employment in the economy. Decreasing unemployment leads to a rise in the mortgage rates, and mortgage rates fall when unemployment increases.
- Federal Reserve – The Federal Reserve Bank plays a pivotal role in determining mortgage rates. Interest rates are affected by the increase and decrease in the supply of money as per the Federal Bank. Rates decrease when money supply in the economy increases. Consequently, when money supply is reduced it leads to a rise in the mortgage rates.
- Economic Growth – The economic growth of a nation is influenced by its GDP (Gross Domestic Product) as well as rate of employment. Positive growth of economy means more employment (i.e. higher income leads to an increase in purchasing power). Mortgage rates rise when there is an increase in the amount of purchasers. So, mortgage companies tend to increase the mortgage rates due to a limited supply. On the other hand, when employment rate decreases, income as well as purchasing power shrinks considerably. This decrease in employment leads to a fall in demand for a home loan which leads to a drop in mortgage rates.
- Geopolitics – Mortgage rates also decrease due to uncertainty in the market caused by unforeseen natural and/or man-made events such as natural disasters, conflicts, political events, etc.
If you are planning to get a home loan, then it is important to be aware of the factors that can influence your mortgage loan. For more information, contact the loan office nearest to you.