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Mortgage Interest rates are affected by inflation concerns, which the Fed tries to keep in check, our National Gross Domestic Product and Unemployment rates. For the most part interest rates are influenced by supply and demand. When the economy is solid and forecasts look good, interest rates rise. When the economy gets more weak and there is less spending, interest rates go down. GDP is the measurement of our consumer spending and the amount of spending is directly effected by to how many people are unemployed. But interest rates are also influenced by what the Federal Reserve, also known as “The Fed”, does and where the fed funds rate is set.

Short-Term & Long-Term Rates

The federal funds rate is the interest rate charged when banks lend funds to each other. This is what we call a short term rate. The maturity of short term rates is less than 2 years. When the Federal Open Market Committee changes the Fed funds rate, it affects mortgage rates which are tied to short-term interest rates, such as home equity loans and adjustable loans. As a result of short-term rates falling, people traditionally borrow and spend more. And as most people know from econ 101, spending more and leed to inflation and that is something the Federal Reserve wants to keep in control.

Long-term interest rates carry a maturity longer than 10 years. For example: 30-year fixed rate mortgages. However fixed rate mortgages also be affected by short-term rates, because long terms rates can rise when there is speculation about increased inflation. Over the last 7 years the Feds started raising short term rates in an attempt to control inflation. In the end, this presented opportunity to home owners who had adjustable rate mortgages to refinance into a more stable and fixed rate loan. Rates on most home loan products remain at historically low levels.

What does this all mean? Well in my world, it means that it’s better to lock then float …. Hoping that rates will go down based on any preconceived notion or report is mortgage suicide. My best advice about rates is: if you’re fine with the rate and the payment, than lock your loan and move forward happy that you did not experience the bad side of the alternative. In any case, it is important to understand some of these market dynamics because a lack of understanding can sometimes cost you a lot of money. That’s why I get paid to do what I do, so that you don’t need to become a forecasting economist before getting your next mortgage.

If you would like to learn more about mortgage interest rates, call me at (503) 929-4615.