If you’re in the market to purchase or refinance a home, chances are you’ve been keeping an eye on interest rates. That’s certainly understandable, since interest rates have such a large influence on the amount of your monthly mortgage payments. If mortgage rates are currently low but are expected to rise in the near future, it’s a good idea to go ahead and lock in the low rate while you still can. But if rates are expected to drop, it might be better to hold off on your house purchase or refinance temporarily so you can benefit from lower rates in the near future. While there is no crystal ball that can tell us exactly where mortgage rates will be in the future, there are certain factors you should know about that affect whether rates rise or fall.
The state of the economy
As with most things available for purchase, supply and demand plays an important role in pricing. In a down economy, there are less people in the market for a new home. To make it more enticing for potential buyers/borrowers to purchase or refinance, lenders will offer low interest rates. On the flip side, a healthy economy generally brings more buyers to the housing market, which lenders capitalize on by raising interest rates.
The Federal Reserve
While the U.S. Federal Reserve doesn’t set consumer mortgage interest rates, its actions certainly play a significant role in whether rates go up or down. Here’s how it works. The Federal Open Market Committee (FOMC) – a 12-person sub-committee within the Federal Reserve – holds several meetings each year. After these meetings, the FOMC issues a press release to the public which provides insight into the group’s economic opinions and forecasts. When the FOMC’s post-meeting press release contains mainly positive statements concerning the U.S. economy, mortgage rates tend to rise. However, when the committee expresses negative economic assessments, mortgage rates tend to fall.
Mortgage rates are also affected by government-issued bonds, which offer long-term investment opportunities. Investment firms use mortgages as an investment product, selling securities to investors who will profit from the monthly interest homeowners pay. Bonds and mortgage securities compete for the same investors, so the performance of the bond market can either push or pull investors to or from the mortgage security market. This changes how much money is available for mortgage lending, thereby affecting lender interest rates.
10-year Treasury yield
Some say that the best indicator of whether interest rates will rise or fall is the movement of the 10-year Treasury bond yield. Since mortgage rates are in competition with U.S. Treasury bond rates, we can look to Treasury bond interest rate trends as a general prediction of fixed-rate mortgage interest rate trends.
Good or bad credit
While all of the above interest rate influencers cannot be controlled by the borrower, credit rating is one thing within your control that impacts your rate. The stronger your credit rating, the lower your interest rate. Higher rates are assigned to borrowers with low credit scores, who are considered riskier in the eyes of lenders.
Thinking about purchasing or refinancing a home? A Cliffco representative would be happy to answer any questions you have about current interest rates. Contact us for more information today.