Mortgage rates can go up or down. There are various reasons for this, but in some ways, it is the economy that affects the rates. Mortgage rates are tied to the economy via things like inflation, the bond market, and the economic growth rate. If you are thinking of getting a mortgage, or if you already have one, you should care about how interest rates are affected by the economy, as it can directly affect your repayments.
Your Credit Score and Debt-to-interest Ratio
While the economy at large affects mortgage rates, as we shall see, micro factors like your credit score can also massively impact your rate. Shopping around to find the lowest mortgage rate is always a good idea, as it allows you to potentially save hundreds or thousands of dollars. You can read more here about mortgage rates. But it is crucial you pay attention to your credit score, regardless of how good a deal you get with your initial mortgage rate. Lenders pay close attention to your credit score and your debt-to-income ratio. Basically, the higher your DTI ratio, the riskier you will come across to the lender. Having a high DTI ratio also means your interest rate will be higher. And the lower your credit score is, the higher your interest rates will be. If you have a low credit rating, you will also have more limited loan options.
Inflation
Inflation means an upward movement in prices, so inflation is a crucial factor for mortgage lenders. Generally, lenders have to maintain interest rates at a level that is sufficient to overcome purchasing power erosion via inflation to make sure their interest returns create a net profit. So, mortgage rates can go up based on current inflation levels.
The Economic Growth Rate
Things like the employment rate and gross domestic product rate influence mortgage rates. When economic growth happens, higher wages are paid and consumers spend more. That includes more consumers wishing to obtain home loans. While economic growth indicators are good for the country as a whole, the increased demand for mortgages propels mortgage rates higher. That is because lenders only have a finite amount of capital they are able to loan. In a slowing economy, things happen the other way around. When employment and wages fall, there is less of a demand for property, which drives down mortgage interest rates.
The Bond Market
The bond market’s overall condition indirectly affects how much mortgage lenders charge for loans. That is partially because government bonds and corporate bonds provide competing long-term fixed-income investments. The money that can be gained on competing investment products affects the yields that mortgage-backed securities offer. Lenders have to generate sufficient yields in order for mortgage-backed securities to be competitive in the entire debt security market.
Federal Reserve Monetary Policy
One of the most important factors that influence the economy as a whole, and mortgage interest rates, in particular, is the monetary policy pursued by the Federal Reserve Bank. While the Federal Reserve does not set specific mortgage rates for the market, the Fed Funds rate can adjust the money supply either downward or upward, which can have a significant impact on the interest rates that are available to people wanting to get mortgages. Typically, an increase in the money supply pushes rates down, while tightening the money supply drives mortgage rates up.
