Mortgage rates are always changing. This change in mortgage rates
is affected by several factors. One major factor that affects the
dynamics of mortgage rates is inflation. Inflation is characterized
by a booming economy and an increase in the prices of goods and other
commodities. When the economy is strong, prices of goods and services
rise, signaling the rise of real estate prices, apartment rents, and
mortgage rates as well.
When mortgage rates are high, then naturally demands for mortgages
and loans slow down. To avoid this kind of effect, the Federal Reserve
Bureau usually lowers down interest rates. This action will cause
inflation to reduce, the economy to slow down, and mortgage rates
to fall. Therefore, basically, the dynamics of mortgage rates is directly
affected by the rise and fall of interest rates.
But despite the tendency of mortgage rates to follow the direction
interest rates are taking, there are also several other factors that
affect mortgage rates. Mortgage rates base their movement on the supply
and demand for mortgages and loans. And because the supply and demand
ratio of mortgage rates slightly deviates from that of other rates,
mortgage rates tend to move differently when occasions arise.
For instance, a lender has a certain quota in the amount of mortgages
he can close in one month. In an effort to reach that quota, he would
have to lower down the mortgage rates of his products in order to
attract more buyers. Even though the market suggests that mortgage
rates should be high, lowering down his mortgage rates will help him
achieve his goal. This is another way of affecting the movement of
How Mortgage Rates are affected by other key factors
Mortgage rates are not only affected by inflation, the overall status
of the economy, and mortgage companies. Mortgage rates are also directly
affected by the amount of the money borrowed. If the amount of the
loan increases, mortgage rates rise up as well.
Certain standards in the amount of loan money given were established
to keep mortgage rates in control. The two commonest standards used
in the United States stock market are Fannie Mae and Freddie Mac.
Every year, the limits of loan amount is either extended or reduced,
depending on how mortgage rates are predicted to move. When the loan
money exceeds the limits set by either Fannie Mae or Freddie Mac earlier
that year, then the mortgage rate will increase.
“From the moment a New Yorker is confronted with almost any large city of Europe, it is impossible for him to pretend to himself that his own city is anything other than an unscrupulous real-estate speculation”
- Edmund Wilson
Mortgage rates differ with the type of loan a buyer chooses. A fixed
rate mortgage usually has higher a mortgage rate when compared to
the mortgage rate of an adjustable rate mortgage. The adjustable rate
mortgage generally has a very low mortgage rate on its first year
but after that, the mortgage rates would depend on the changes on
the mortgage company’s prime rate.
Likewise, mortgage rates are affected by the duration of the loan.
30-year mortgages usually have lower mortgage rates compared to 15-year
mortgages. Lower mortgage rates allows buyers to save on their monthly
payments, thus letting them channel those extra funds to other good
investments. On the other hand, higher mortgage rates in 15-year mortgages
allow buyers to pay off their loan much quicker. This is because a
portion of their monthly payments on mortgage rates are used to pay
off the principal loan amount.
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