Factors That Will Affect Mortgage Rates

Factors That Will Affect Mortgage Rates

Factors That Will Affect Mortgage Rates

Before you begin your search for a home and before you apply for a mortgage, maybe it would be a good idea to first look into the different types of mortgage interest rates and the factors that make them increase or decrease. Mortgage interest rates often fluctuate and the reasons are:

Supply and Demand

This factor does not only dictate the cost of homes, but also the rates of mortgages. The supply and demand applies in everything that is being sold, whether it is small or big. The mortgage interest rates will go up if there are a lot of people looking for homes, and it relies on the bulk of people applying for mortgage. Conversely, the rates will go down if the demand for mortgage is low. This factor is based also based on the economic situation of a country.

Banking Costs

Banks or financial institutions pay interest rates on the savings accounts and cash deposits of their clients, and the rates are dictated by the Cost of Funds Index. When the interest rates in banks increase, the mortgage rates also follow the same trend and if it decreases, the rates of mortgage will also decrease. The COFI is basically based on the local as well as worldwide economic conditions.

Federal Reserve

The Federal Reserve sort of regulates mortgage interest rates and their decision to either increase or decrease it depends upon the overall economic condition. However, this does not mean that it entirely controls interest rates. Its power is only limited to rates of short-term maturities, Overnight Lending and Federal Funds. The prime rate is affected by all these three factors.

Prices of Bonds

The rates for mortgages are tied to bonds called mortgage backed securities (MBS). In case the price of the bonds goes up, the rates will go down. This trend enables financial institutions to offer them at a higher price. On the other hand, if the price of the bonds goes down, the rates will go up. The price of the bond depends on a lot of factors, and one is the price of stocks.

There are several factors that determine the rate of interests of mortgages, but as you've noticed, they all have a common element that greatly affects it, which is a nation's or the world's economic condition.

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