Mortgage interest rates are of major concern to most borrowers. It’s one of the largest factors when considering how much the loan will cost. Deciding when to lock in the rate requires you to understand the economic factors surrounding interest rates.
While it’s impossible to predict what rates will do 100%, you can at least have a general idea of the direction they’ll take with the following information.
If there’s one factor that affects interest rates the most, it’s the U.S. Treasury bonds. Bonds and mortgage investments provide a similar level of return for borrowers, so they tend to compete in the investment market. The higher the bond market rates go, the higher the mortgage interest rates go. It’s a direct relationship.
You will find that mortgage rates will be higher than T-bond rates, though. They will not be identical and that’s strictly because of the risk involved. Treasury bonds are one of the safest investments available today. Mortgage investments, while not as safe, are a pretty safe bet. However, investors often require a slightly higher rate of return in order to account for the higher risk.
In other words, if you see bond rates going up, chances are you can expect mortgage rates to go up as well.
The Federal Government and the Prime Rate
The Federal Reserve Board has to step in from time to time and change interest rates in order to push the economy one way or another. One of the key economic factors they change is the prime rate. If the Fed has to raise the prime rate, it’s often to slow the economy down. If this happens, mortgage interest rates usually increase. In fact, they often increase at the mere thought of the prime rate increasing as a precaution.
If the Fed comes in and lowers the prime rate, however, this is because the economy is slacking and it needs help. Again, because the mortgage rates are often directly related, mortgage rates tend to drop. This helps the economy improve as mortgages become more affordable and more people can buy houses.
Old Fashioned Supply and Demand
Finally, good old-fashioned supply and demand play an important role too. Just like in any market, the more demand there is for mortgages, the higher the rates will go. The supply is not lacking, so lenders can increase the rates and still expect to stay busy.
When the demand is low, though, lenders want to attract borrowers. They do so by lowering interest rates to make it more affordable for them to get loans. While supply and demand are not true economic factors, they do play an important role in how interest rates react from day to day.
Paying close attention to the prime rate, and T-bond rate can help you have a general idea of what mortgage rates will do. Understanding these economic factors and staying in contact with your lender will help you know when you should lock an interest rate before rates jump too high.Click to See the Latest Mortgage Rates»