If you are considering an Adjustable Rate Mortgage (ARM) then understanding how mortgage rates fluctuate is likely to be one of your main concerns. Even if you are in the market for a fixed-rate mortgage, you may want to know how those fixed rates are set in the first place. While mortgage rates may appear mysterious and at times confusing, the truth is that they are determined according to very specific factors, such as the Federal Reserve, economic conditions, private lenders, and overall supply and demand. Understanding how these factors may impact mortgage rates could help you better plan for the future.
The Federal Reserve is the country’s central bank and it controls how much money flows into the economy. The Federal Reserve’s main job is to ensure long-term economic growth and stability and it does this by either restricting or increasing the money supply in the United States. By controlling how much money flows through the economy, the Federal Reserve is able to affect interest rates indirectly. For example, if the Federal Reserve wanted to encourage more borrowing and stimulate the economy then it would take steps to lower interest rates. If however, it wanted to prevent the economy from “overheating” then it may try to raise interest rates.
Economic conditions have a major impact on interest rates. During a recession, unemployment and financial hardship mean demand for home loans typically decreases. When demand decreases, then interest rates will often fall since fewer people can afford the relatively high interest rates that existed prior to the recession. These lower interest rates in turn, may lead to an expansion of the economy. When the economy expands and more people become more affluent, then demand in the market also increases and likewise, interest rates also go up.
Private lenders, such as banks, need to ensure that they are running at a profit. As such, the mortgage rates they charge must both be low enough to attract consumers, but high enough to ensure profitability. Banks largely determine mortgage rates based on the cost of obtaining money. When capital is easily obtained, then banks are in a position where they can offer consumers lower interest rates. However, when the flow of money has been restricted, the cost of raising capital for the bank increases; the increase in cost is reflected in higher mortgage rates.
Supply and Demand
When the demand for homes is greater than the actual supply of homes, then interest rates are likely to go up since there are essentially more people competing for fewer properties. When fewer people are in the market for a new home, then interest rates tend to go down since lenders must offer more enticing products to attract new customers.
As a top mortgage company in the United States, Gershman Mortgage has the experience and expertise to help you with any of your home purchasing or refinancing needs. We can help you determine what kind of home loan would be best for you, such as a fixed-rate or adjustable-rate mortgage, so that you will be able to get the financing you need to realize your home ownership dream.