Buying a huge financial decision for anyone. Especially considering just how many factors can influence the final price and impact on your finances over the next few decades. Many first-time home buyers mistake the listing cost of the house as the only number that matters. However, after the final buying price, the most important number is your mortgage interest rate.
Why? Because this determines how much extra you will pay the bank for the favor of lending the money for your house. Just to put things in perspective, a 3% interest rate per year on a 30-year mortgage for a loan of $200,000 will actually cost you about $103,500 in interest payments. So this is an important calculation.
The challenge is that mortgage rates don't hold still. Not only do they change on a national and industry level, but your personal situation also has a great deal of impact on the interests rates banks will offer you. Today, we're here to talk about what important factors could affect your mortgage interest rate.
What Affects the National Mortgage Rate
The first thing to understand about interest rates is that this is how banks make money. They don't stay in business if loans don't generate income. So the first set of things that establishes a baseline for mortgage rates is the economy. If it's easier for banks to make money, interest rates can go down. If it's hard for them to make money, interest rates go up to increase their income.
Inflation means that a dollar is not worth as much over time, and inflation is a continual process for almost any large company with a flowing economy. It's just one of those strange facts about economics. However, that means that when banks are locking down the numbers, they have to stay ahead of the interest rate. If, for example, money were losing value at 2% a year, but they give you a 1.5% interest loan, they actually lose money on the loan.
Economic Growth - Mortgage Supply
Economic growth means that the population is doing better financially, with less unemployment and higher salaries across the board. When people are making more money, they are more likely to buy houses and need mortgages. However, because banks only have so much money to lend (and therefore a limited supply of mortgages to grant), interest rates actually go up. And buyers will pay because of the competition for available mortgages.
Housing Market - Mortgage Demand
But sometimes the pendulum swings the other way. The state of the housing market can also affect mortgages. Particularly in what as known as a 'seller's market' when there are not enough houses for everyone who wants to buy.
Few houses to buy means fewer mortgages taken out, which means less business for banks. Just like a retail outlet throwing a sale to boost business during a slow season, a slow real estate market does the same to banks. A bank eager to lend mortgages to get the future income from interest will lower interest rates to attract buyers.
The federal reserve controls the national interest rates by influencing how much money is in active circulation in the country. They have direct control over many interest rates and indirect control over the value of money overall. Officially, the federal reserve's decisions are to control the rate of inflation. Which, in turn, influences mortgage rates.
As a rule of them, when the reserve increases the amount of cash in the system, interest rates tend to go down. And then rates go up if the amount of cash in action is decreased.
The Bond Market
Finally, mortgage rates are influenced by how the bank's other income generation methods are coming along. The bond market is another important aspect of bank income, and they compete with the federal bond offers to make their business. If banks are doing well and more people are buying private bonds that will make a profit, mortgage interest rates can safely go down. But if the bank is losing business to federal bonds or other banks, mortgages will have higher interest rates to cover the difference.
Of course, these are only the ways that the financial environment at the time of your mortgage influences interest rates. When you hear people talking about how "mortgage rates are low right now" or "mortgage rates are on the rise", these are the factors at play that influence what banks are willing to offer.
The mortgage rates you will experience start from here. The national average, and the amount that the particular bank you choose to work with can afford to offer. From that point, your own personal situation will influence whether the bank is willing to cut you a break or stack the interest. And, like all decisions a bank makes, this is based on whether they think you are a sure bet for repayment or a risky investment.
Join us again next time for the second half of this two-part article where we'll talk about all the things that can influence your personal mortgage rate beyond the national and local financial landscape.