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what drives mortgage interest rates

What Drives Interest Rates?

Written by Poli Mortgage Group on Friday, 17 April 2015 12:54 pm

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Everyone wants to land a home mortgage loan with a favorable, low interest rate … right? The media is always broadcasting changes in rates, and when rates are low, the housing marketing sees an uptick as home buyers talk to their lenders, receive approval for loans with attractive rates, and set out house hunting.

But do you know the prevailing factors that drive interest rates? Why do they fluctuate? What pushes them up or forces them down?

There is no one factor that controls interest rates. Rather, it's a set of variables that cause interest rates to change over time. Here are several of the main influences:

1)General Economic Growth. The overall economic climate of the United States can be a predictor of the direction in which interest rates are headed. In times of general economic prosperity, when unemployment is low and growth prospects abound, mortgage interest rates tend to climb. During times of economic downturn, rates are likely to slip lower.

2)10-Year Treasury Bond. The yield on the 10-year Treasury bond is held as an indicator of long-term interest rates. Lenders use this benchmark to ensure that mortgage loans will be profitable to them in the long term. Changes to this yield can prompt changes in the rates lenders are willing to offer.

3)Supply and Demand. The housing market can also drive interest rates up or down. When there is an ample supply – or a surplus – of inventory on the market, rates tend to be lower, whereas in a fast-paced housing market with little inventory and quick turnover, homebuyers can see increased interest rates in response to the high demand for housing.

4)Inflation. Inflation means increased prices of goods and services, and lenders are not immune to rising

costs. Rising prices can force lenders to raise rates in order to ensure that the loans they offer remain profitable.

5)The Federal Reserve. In order to measure economic activity on a national scale, the Federal Reserve Board, the banking oversight arm of the federal government, meets regularly to determine the direction in which the economy is headed and its level of growth or stagnation. In times of little economic growth, the Fed can increase the flow of money into the economy, driving interest rates down in an effort to spark economic growth and encourage spending. When the economy is flourishing, the Fed can make the opposite decision: to decrease the flow of money, resulting in an upward turn in interest rates.

6)Natural Disasters. The occurrence of any type of major or widespread national disaster can have an impact on interest rates in an area. Disasters typically have an effect on the economy as well as on housing supply and demand, creating fluctuations in rates.

The above factors affect interest rates at a general level, but the circumstances, terms, and rate attached to each home loan are unique. Buyer circumstances such as credit rating and debt-to-income ratio can also prompt a lender to offer favorable or less favorable rates. Good credit and a healthy debt-to-income ratio create a better risk for a lender, who may then offer a home buyer a more attractive interest rate because the perceived risk of a loan default is lower.

If you're unsure about current prevailing rates or if you want to know more about how your personal financial circumstances might measure when applying for a home loan, talk to your loan officer. He or she will be able to give you a better sense of the type of interest rate for which you might qualify – and even preapprove you for a mortgage loan in the process.

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