Mortgage rates are always changing. This change in mortgage rates is affected by several factors:
One major factor that affects the dynamics of mortgage rates is inflation. Inflation is characterized by a booming economy and an increase in the prices of goods and other commodities. When the economy is strong, prices of goods and services rise, signaling the rise of real estate prices, apartment rents, and mortgage rates as well.
When mortgage rates are high, then naturally demands for mortgages and loans slow down. To avoid this kind of effect, the Federal Reserve Bureau usually lowers down interest rates. This action will cause inflation to reduce, the economy to slow down, and mortgage rates to fall.
Therefore, basically, the dynamics of mortgage rates is directly affected by the rise and fall of interest rates.
But despite the tendency of mortgage rates to follow the direction interest rates are taking, there are also several other factors that affect mortgage rates. Mortgage rates base their movement on the supply and demand for mortgages and loans. And because the supply and demand ratio of mortgage rates slightly deviates from that of other rates, mortgage rates tend to move differently when occasions arise.
For instance, a lender has a certain quota in the amount of mortgages he can close in one month. In an effort to reach that quota, he would have to lower down the mortgage rates of his products in order to attract more buyers. Even though the market suggests that mortgage rates should be high, lowering down his mortgage rates will help him achieve his goal. This is another way of affecting the movement of mortgage rates.
How Mortgage Rates are affected by other key factors
Mortgage rates are not only affected by inflation, the overall status of the economy, and mortgage companies. Mortgage rates are also directly affected by the amount of the money borrowed. If the amount of the loan increases, mortgage rates rise up as well.
Certain standards in the amount of loan money given were established to keep mortgage rates in control. The two commonest standards used in the United States stock market are Fannie Mae and Freddie Mac. Every year, the limits of loan amount is either extended or reduced, depending on how mortgage rates are predicted to move. When the loan money exceeds the limits set by either Fannie Mae or Freddie Mac earlier that year, then the mortgage rate will increase.
Mortgage rates differ with the type of loan a buyer chooses. A fixed rate mortgage usually has higher a mortgage rate when compared to the mortgage rate of an adjustable rate mortgage. The adjustable rate mortgage generally has a very low mortgage rate on its first year but after that, the mortgage rates would depend on the changes on the mortgage company’s prime rate.
Likewise, mortgage rates are affected by the duration of the loan. 30-year mortgages usually have lower mortgage rates compared to 15-year mortgages. Lower mortgage rates allows buyers to save on their monthly payments, thus letting them channel those extra funds to other good investments. On the other hand, higher mortgage rates in 15-year mortgages allow buyers to pay off their loan much quicker. This is because a portion of their monthly payments on mortgage rates are used to pay off the principal loan amount.