What Affects Mortgage Interest Rates?
by Dennis Hartman
Many people would be unable to buy a home without a reasonable mortgage rate.
Supply and Demand
Like any consumer product, mortgage rates are affected by supply and demand. This controls the interest rate of mortgages on a fundamental level. When many people are seeking mortgages to buy homes, lenders can charge higher interest rates. When the economy is moving more slowly and there are fewer buyers, lenders may be forced to reduce interest rates to attract borrowers. Supply and demand keep mortgage interest rates in a constant state of flux.
Government-issued bonds affect mortgage rates on another level. Investment firms use mortgages as an investment product, selling a stake in home mortgages (known as securities) to investors who will profit from homeowners paying interest each month. However, government bonds offer a similar long-term investment opportunity. Because bonds and mortgage securities compete for the
same investors, the performance of the bond market can drive investors away from, or toward, the mortgage security market, changing how much money is available for mortgage lending and, indirectly, the rates that mortgage lenders charge.
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