Economy Affects Mortgage Interest Rates

We go to banks and other financial institutions in search of mortgage loans.  We want the best rate we can get.  Depending on the time of year and indeed the year itself, the interest rates for mortgage loans can be high or they can be low.  They can stay at either end for a period of months or years, or they can fluctuate somewhere in the middle.

My question is:  What part does the economy play in the interest rates that we pay on our mortgage loans?  The answer is interesting.  When we think of the economy, we might envisage some government bureaucrat sitting in an office seeing which way the wind blows with his finger before typing a memo which states the current interest rates.

This is quite a rudimentary picture, but depending on which way the wind blows, our mortgage interest rates are affected.  One condition that affects them is the Federal Reserve.  They hold all of the government’s money and some for others.  The discount rate offered by the Federal Reserve trickles down to us, the humble borrower.

The discount rate is affected by the climate of the economy, namely government policy.  Any number of new policies can send prices on goods and services higher or lower.  Banks borrow money from the Federal Reserve based on this discount rate.  If the rate is higher, then banks pay a higher interest rate.  In turn, we who borrow from banking institutions get a higher rate also.

There is a committee (the Federal Open Market Committee) that meets to discuss the discount rates.  At this meeting they can lower or raise the discount rate.  This rate affects shorter term loans like home equity loans and adjustable rate loans.

When the economy is good and people are borrowing money, the economy takes an upturn.  The interest rates also take an upturn.  The increase in interest rates is passed on to the person trying to get a home loan.  When the market is in a slump, home sales are down, and the economy is not being friendly, interest rates fall.  The lower rates are passed on to the borrower.

No one knows for sure when the rates will rise and when they will fall.  It is a toss-up as to what will be decided in these committee meetings.  All I know is that when people aren’t working and more homes are in foreclosure the outlook isn’t good.  Interest rates fall, but it could be harder to qualify for the loans.

When the economy is good and interest rates are high, lenders will lower rates to get you in the door.  Competition is also a driving force in the economic world.  It is the law of supply and demand at work.  Interest rates change by the week or the month.  Keep watch on the big picture as well as local trends to know when to find the best mortgage interest rates.