Why Do Mortgage Interest Rates Fluctuate Very Often?
Mortgage interest rates fluctuate based on variations in major economic elements that connect to come to a specific rate at a specific point in the economic cycle. Lenders keep monitor economic activity in regards to the mortgage market in an effort to increase returns from lending activity in the times of strong and weak economic growth. Mortgage interest rates fluctuate very often and there has been a huge change from decade to decade. During the 1980’s, for instance, mortgage rates were as high as 18%, while roughly three decades later they are less than a third of that rate.
Let us see some of the factors that cause changes in mortgage rates.
The Federal Reserve will keep a balance between inflation and the national unemployment rate. It influences this balance with its federal fund rates – the interest rate that banks charge each other for overnight loans. The Fed’s Open Market Committee meets around every six weeks to increase, lower or leave unaltered the current federal funds rate. That rate fell to as low as 0% in the times of Recession in order to stimulate economic growth and started to rise again as of the end of 2015 post the economy begin to display real signs of progress again. Post the Fed raises its rate that increases drip down to long-term loans like mortgages.
Also, the change in rates is associated with how many potential borrowers are requesting loans. If there are fewer borrowers in a particular area, lenders will likely lower their interest rates.
3. The Secondary Market
Many of the home loans are packaged together and sold to investors as mortgage-backed securities on the secondary market, and if there are any changes in supply and demand can also cause changes in mortgage interest rates. If investors get frightened, they often look for the safety of bonds, which can lower mortgage rates.
4. The National Economy
The economy’s situation also has an effect on the mortgage market and its rates. If the economy grows, mortgage rates also rise to get aligned with inflation and the volume of home loan applications but fall when the economy is struggling. If the economy is going down, the demand for housing often falls, and supply increases with more mortgage lenders competing for a smaller slice of the pie. This pushes for the lowest mortgage rates.
5. The Global Economy
Apart from all the domestic financial variations that decide mortgage interest rates, they are also influenced by global concerns. Some of the things like political instability, financial crisis, grown foreign economic competition, changes in fuel costs and changed trade agreements will play a pivotal role in whether mortgage interest rates rise or fall. If foreign elements enrich the American economy, mortgage rates will likely increase while they will fall if foreign influences threaten the economy’s growth.
To keep pace with the economic growth and decline, mortgage lenders keep an eye on economic conditions to measure how the economy is likely to perform in the short- and long-term. Forecasting economic conditions will help know how interest rates are likely to behave. In the end, mortgage lenders can accommodate economic changes like inflation.
Mortgage interest rates are also influenced by the situation in the real estate industry that shows the strength of the demand for mortgages. Mortgage lenders also monitor the construction and sale of new homes. If sales and building activity grows, lenders expect the demand for mortgage borrowing to grow, increasing mortgage rates. In contrast, reduction in sales and construction of new homes shows a weaker demand for new mortgages, pushing for lower interest rates.
While it is difficult to find out the exact reasons for each mortgage rate changes, there are some basic reasons why rate change and they can help in identifying long-term interest rate trends. It is better to approach someone who knows what causes mortgage interest rates to fluctuate. In the nutshell, a lower interest rate can help you save thousands of dollars over the life of your loan.