Mortgage rates fluctuate from one day to the next based on dozens of economic factors. According to leading Downtown San Diego real estate experts, it’s important to understand the factors that influence mortgage rates because the rate you get will affect the long-term cost of your loan. Here are some of the most important factors that determine the rate a lender is willing to offer.
Mortgage interest rates are very susceptible to economic growth. Data like recent jobs reports, home sales, consumer confidence indexes, the consumer price index, and more can affect mortgage rates overnight. Bad economic news tends to lower rates while good economic news–such as strengthening home sales or lower unemployment–tends to drive rates higher.
Inflation is an upward trend in prices over time, which decreases purchasing power. Because inflation can erase the value of any profits on a loan, lenders respond to inflation by increasing mortgage rates to preserve the value of their returns.
Federal Reserve Policy
The Federal Reserve is the country’s central banking authority and an important influence on the economy. While the Federal Reserve does not directly set interest rates that are offered to consumers, it indirectly influences interest rates by adjusting the supply of money that circulates in the economy. When the Federal Reserve increases the supply, interest rates go down.
Lenders tie mortgage rates to the 10-year Treasury yield because it minimizes the effects of economic cycles. Most lenders consider the yield on the 10-year Treasury bond a benchmark on long-term rates, such as those offered for 30-year mortgages. The movement of the 10-year Treasury bond is a good indicator of where mortgage rates will go. When bond yield goes up, interest rates tend to go up as well.
The housing market impacts mortgage rates in dozens of ways as any changes in supply or demand can make rates go up or down. If the unemployment rate goes up, for example, it reduces demand for home loans and pushes rates lower. Supply may be impacted if fewer homes are built or there is a surplus of inventory due to foreclosures.
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