When the last of the brightly colored leaves cling tightly to otherwise bare trees, you know that winter is coming. It’s a sad state of affairs, but happens every year, just like clockwork. The
How Are Mortgage Interest Rates Impacted By Other Financial Market Factors
Dated: June 6 2018
There has been a flurry of news on various economic factors lately. Each number has an impact on all interest rates charged on loans, including mortgage loans. Even a small increase in mortgage rates can have a significant impact on a home shopper’s buying power. On top of the borrower’s financial history, these factors play a large part in the rate charged on a home loan. Read on to learn how the latest economic news might impact rates in the coming months.
The Federal Reserve System, commonly referred to as simply “The Fed,” is the central bank of the United States, 12 regional Federal Reserve Banks, the Board of Governors of the Federal Reserve System, and the Federal Open Market Committee (which includes the Board of Governors). The Fed monitors the financial health of the US economy and sets monetary policies in order to maintain stability. The board meets 4 times per year to review data and economic projections and establish the federal funds rate. The federal funds rate is the rate that banks charge other banks to loan money, and impacts interest rates on loans of all kinds. As you may have guessed, when the federal funds rate increases, mortgage interest rates will increase as well. The Fed’s policies also have an impact on inflation, employment rates, and even the value of our currency!
When listening to economic reports on the news, you’ll often hear talk about the bond market. Simply put, bonds are money loaned to large corporations or governments that pay interest as they repay the debt over a set period of time. Unlike stocks, bond payouts are pretty consistent investments. But what do bonds have to do with mortgages? Mortgage borrowers are individuals, and while the loan term may be a set number of years, most people pay off the loan well before the maturity date when they sell or refinance. They’re 2 different financial products indeed, but the one major aspect they share is their appeal to investors looking to generate long-term income. Mortgage-backed securities (or MSBs) are popular investment portfolio options, and most often yield between 1.5 to 2% more money than US Treasury bonds. When investors and banks purchase MSBs, they are essentially buying into a pool of mortgage loan debt to collect the interest. Payments on Treasury bonds are guaranteed by the government, while MSBs rely on homeowners to make their payments, so the higher reward is necessary to offset the higher risk level. The higher the risk, the higher interest rate charged to the mortgagee, and therefore, the yield to investors will also be higher. As investors buy MSBs, they free up funds that banks use to issue new mortgage loans, allowing more home buyers to finance homes. As rates increase, MSBs become more attractive to investors, but less attractive to borrowers at the same time.
Supply and demand impact real estate markets in a big way, and therefore, mortgage lending. When the economy is strong and employment rates are low, demand for homes tends to increase. The majority of home buyers will rely on mortgage loans to finance their home purchases, so buyer demand will directly correlate to mortgage loan demand. When The Fed lowers rates, it can increase mortgage and home buying demand, but keeping rates low can deter investors and lead to inflation- a decrease in the buying power of a unit of currency, or in other words- a decline in the value of a dollar. When the demand is strong and other economic factors are healthy, rates will typically increase to keep inflation rates in check.
If you’re planning to buy a home or refinance your existing mortgage loan any time soon, pay attention the key factors above on weekly and monthly financial reports. With a little knowledge, you can forecast for yourself when a rate increase is on the horizon and act quickly to ensure that your financial interests are protected.
As always, real estate tends to be a reliable investment with long term value appreciation. According to the Federal Reserve’s Survey of Consumer Finances in 2013, the net worth of a homeowner was, on average, about 36 times the net worth of a renter, thanks to the equity homeowners earn as they make monthly payments and home prices increase. If you’re looking to make your first real estate investment, or add to your portfolio, GroupWatson agents are experienced real estate investment guides.
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