Mortgage rates are probably the most concerning part of the mortgage process. Sure, you have to get approved and that can be nerve-wracking, but the rate determines your payment. Many borrowers believe they need the lowest rate possible. This often forces them to choose a loan that doesn’t benefit them, like an adjustable rate mortgage. These loans often have the lowest rates at the start of the loan. However, the rate adjusts over time.
Whatever the case may be for you, understanding why rates change can help you wait for the right time for a new loan.
The Economy and Mortgage Rates
The largest factor is the state of the economy. As a borrower, there’s nothing you can do about it. In short, the better the economy fares, the higher interest rates go. The worse off the economy is, the lower interest rates get. It’s the hope that lower interest rates will help spur the economy.
So what affects the economy? There are hundreds of things. The most common are natural disasters, wars, and political issues. Anything that makes consumers worry usually negatively affects the economy. Consumers stop spending so the economy tanks. When everyone feels good about the world, they tend to spend more. Each of these behaviors can affect interest rates.
When the economy does well, prices tend to rise. This makes the standard dollar worth less than when the economy wasn’t doing so well. As prices increase, housing prices tend to follow. This makes it harder for borrowers to purchase a home. As the housing market slows down, rates tend to rise.
This is because lenders must charge more to make the same money they made prior to the inflation. In general, if inflation increases, so do mortgage rates.
A seller’s market is when there are many more buyers than sellers in the market. Sellers often have multiple bids they can choose from. They can also ask more for their homes. In this case, mortgage rates tend to increase. It’s like supply and demand. The lower the demand, the lower rates drop. The higher the demand, the higher rates increase.
A buyer’s market is when there are more properties than buyers on the market. Buyers then have their pick of the market. They often don’t have much competition in the way of bidding on homes either. Because the demand is low and the supply is high, interest rates tend to drop. This helps encourage more buyers to purchase a home and help the economy.
Sometimes, mortgage professionals can predict what will happen in the market. They closely monitor the real estate industry. Specifically, they watch new construction. When building increases, it usually means more mortgages will be needed. This means a high demand, which often means higher interest rates. Lower demand means there is less new building and sales going on and the market needs a boost. They usually accomplish this with lower interest rates.
The Federal Reserve’s Indirect Influence
Many people believe the Federal Reserve directly affects mortgage rates. They don’t. They can, however, influence interest rates. The Federal Reserve controls the money supply. If they increase the money supply, banks don’t have to rely on interest. This may allow interest rates to drop. If the Federal Reserve doesn’t increase the money supply, though, banks must rely on the interest. This may cause them to rise.
How Often do Mortgage Rates Change?
Unfortunately, there is no rhyme or reason regarding when mortgage rates change. One thing you can bank on is they change during business days/hours only. How often they charge varies, though. You may find that one day they change several times throughout the day. Other days, they may not change at all. It depends on all of the above factors. Sometimes those factors are more volatile than other times.
Locking in the Right Rate
If you are in the market for a mortgage, you must know when to lock in your rate. Without a crystal ball, you’ll never know if things will change in the future. The best thing to do is look at the factors and make your best guess. Talk to your lender and see what they think. They usually have a good idea regarding what rates may do.
Always remember, a slight increase or decrease in a rate probably won’t make or break your mortgage. Even a 0.5% difference may only mean a few dollar difference. For example, a $100,000 mortgage at a 3% interest rate for 30-years has a $422 payment. The same loan at a 3.5% interest rate has a $449 payment. That’s a difference of $27.
Mortgage rates change to protect the economy. While fluctuating might seem like a nuisance to you, it helps everyone in the end. Try timing your mortgage lock at a time when rates are at their best. If they aren’t, it may not make a big difference in your payment. Talk to your lender to see what the best choice is for you at the time. This way you can make the most of your new mortgage!