What Causes Mortgage Rates To Go Up?
- Learn about what causes mortgage rates to rise.mortgage image by hans slegers from Fotolia.com
Mortgage interest rates, just like the weather, can be unpredictable. One day they fall, and the next, they rise. Mortgage rates are rarely stable for a long period of time. If you’re shopping for a mortgage, you’ll probably want to keep a close eye on the fluctuating rates. To better understand how it works, it is a good idea to understand several of the reasons why mortgage rates go up. - When there is a huge volume of mortgage loans available to home buyers on the market, interest rates decrease because it is hard to attract customers to each individual bank or mortgage originator. Since banks and other mortgage companies make money by selling loans to investors, these banks and mortgage companies will have to lower rates to compete. But, if there is a decrease in the number of mortgage loans available on the market or a decrease in the number of third-party investors who want to buy the loans from banks, then interest rates rise. Generally, this means the law of supply and demand affects mortgage rates as well. When there are a lot of people shopping to purchase new property, mortgage rates shoot up.
- Federal intervention is another factor that affects mortgage rates. The federal government invests money in the mortgage industry, so if the federal government pulls out its investments from mortgage companies, the companies will have no choice but to increase mortgage rates. In addition, while federal interest rates may not directly affect mortgage rates, mortgage rates tend to follow the increase or decrease of federal rates. So when the economy strengthens and the government increases the rates to slow down inflation, mortgage rates also increase.
When the Federal Reserve believes that the economy is strengthening, interest rates will increase because the lenders will feel that consumers can better afford the higher rates. On the other hand, if the economy is slow, the Federal Reserve will make a cut on the short-term interest rates, and mortgage interest rates might fall. - Inflation, the rate at which prices rise, is an indicator of what consumers' purchasing power is compared to future purchasing power. Inflation can affect mortgage rates. When financial experts and economists project high inflationary periods, mortgage interest rates increase because it affects the value of investing in mortgages for those who buy the loans from the banks.
For example, assume that a third-party investor wants to buy a mortgage from a bank. If that mortgage's rate is at 5 percent, and inflation is at 2 percent, then the investor is going to make 3 percent on the loan, because he essentially will lose 2 percent of his gain since prices on everything have risen 2 percent. If inflation is high and prices rise 4 percent, then investing in mortgage with a 5 percent is not a good investment since it beats inflation only by 1 percent. As a result, fewer third-party investors will want to buy mortgages at low interest rates, and mortgage loans will rise to draw in more buyers.
