Mortgage rates fluctuate based upon changes in key financial factors that interact to determine that a particular speed at a particular point on the financial cycle. Lenders routinely monitor economic activity related to the mortgage marketplace to try to maximize returns from lending activity during periods of weak and strong economic growth.
Economy
Changes in economic development can result in an increase or decrease in interest prices. This has implications for mortgage lenders that fix their lending rates to fulfill their rates of return mortgages to stay profitable. By way of instance, an increase in economic development generally generates an gain in the general level of interest rates in the market, which puts upward pressure on mortgage prices. However, the reverse is true when a drop in economic growth brings down interest rates and lenders adjust their lending rates accordingly.
Forecasts
To stay ahead of economic growth and decline, mortgage lenders often study economic conditions to gauge how the market is very likely to do in the short- and long-term. Forecasting economic conditions lends insight to how interest rates are likely to behave. Because of this, mortgage lenders may adapt economic fluctuations like inflation. By way of instance, continued economic growth we all understand encourages inflation. If inflation is expected to occur, lenders adjust their mortgage prices to keep up with inflation.
Money Supply
Mortgage rate fluctuations are also influenced by government policy. Especially, the Federal Reserve is a key element in controlling rates of interest and reining inflation by adjusting the supply of money on the market. If economic growth generates an excessive amount of inflation, the threat to the market is that buying power deteriorates. To avoid a costly drop in the purchasing power of money, the Federal Reserve buys a calculated amount of Treasury bonds on the open market to inject money into the market. The effect of additional money helps decrease interest rates to more sustainable levels.
Economic Indicators
Mortgage rates also vary based on certain financial indicators. By way of instance, the federal funds rate is the interest rate banks pay when they borrow from one another, typically overnight, to meet federally mandated reserves that have to be saved in banks. The federal funds rate forms the foundation on which banks determine their interest prices. Other indicators may include both the Consumer Price Index and the Producer Price Index, which measure changes in costs on products bought by consumers and manufacturers.
Mortgage Market Requirements
Mortgage interest rates are also influenced by developments in the real estate industry that help indicate the strength on the need for mortgages. For instance, mortgage lenders monitor the sale and construction of new homes. If sales and construction action increases, lenders anticipate the need for mortgage borrowing to grow, pushing mortgage rates upwards. Conversely, declining sales and construction of new homes indicates a weaker demand for new mortgages, forcing interest rates lower.