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How Economy Affects Mortgage Interest Rates
By: Jenny Lane
For most people, the biggest purchase they will ever make is their home. In fact
though, their mortgage and the mortgage interest rates it connotes are a larger
purchase than their home. In single loan term, the amount you pay to cover the
mortgage interest rate cost is more often than not more than what you paid for
your house. Reducing even a fraction of your mortgage interest rates can save
you a great deal of money on your mortgage.
The Factors That Affect Mortgage Interest Rates
The rise and fall of mortgage interest rates have become erratic during the past
20 years. As a rule of thumb, mortgage interest rates go up when the economy is
strong and stock prices rise. On the other hand, if economy weakens, mortgage
interest rates go down.
In today’s market, the mortgage interest rates are much lower than they were in
the mid-1980s to the 90s. But within the next year or two, financial experts
have come up with predictions mostly outlining the rise of mortgage interest
rates.
A sad fact however, is that with mortgage interest rates, there are no
certainties and no guarantees. No one can really tell whether or not mortgage
interest rates will rise over a period of time. The current mortgage interest
rate that you are charged right now is something that your banker or broker
cannot control. Often, loans with unattractive mortgage interest rates are sold
to FannieMae or FreddieMac which in turn, sell these loans to the secondary
market.
Mortgage investors purchase these secondary market loans with mortgage interest
rates that are undesirable to the regular homebuyer. These investors are
actually the ones who set the standards in mortgage interest rates.
What Happens to Mortgage Interest Rates When Economy is Booming?
When news of a growing economy erupts, the Fed will raise the mortgage interest
rates in an effort to slow down economic growth and lower stock prices. As a
result, the investors would demand higher mortgage interest rates from their
lenders. To sell their loans, lenders will increase their mortgage interest rate
yields. This drives mortgage interest rates even higher.
What Happens When Economy is Going Downhill
When the economy goes down on the other hand, the same thing happens with
mortgage interest rates, but in reverse. The Feds will cut down the mortgage
interest rates in order to bring the economy back to life. Investors will start
buying more bonds while the mortgage interest rates are low. Demand grows and
loan sellers offer their products with lower mortgage interest rates. Thus
consumers will be able to get loans for decreased mortgage interest rates.
What Are Mortgage Interest Rates Based on?
Mortgage interest rates are based on a financial instrument called index. LIBOR
(London Interbank Offered Rate) is among the most common indices that mortgage
interest rates are based on. Other mortgage interest rate indices are 1-Year
Treasury Security, Prime, 6-Month CD, and the 11th District Cost of Funds (COFI).
These indices for mortgage interest rates are subject to the financial
conditions of the market.
Loans are offered with different mortgage interest rates. Take for example a
traditional 30-year mortgage. This type of loan involves a fixed mortgage
interest rate. The mortgage interest rate of a 30-year mortgage is higher than
that of a 15-year mortgage.
Other alternative programs and payment plans for your loans can some difference
on your mortgage interest rate. An adjustable rate mortgage initially has lower
mortgage interest rates compared to fixed rates.
So basically, the effect of economics on mortgage interest rates is also
counteracted by the type of mortgage you choose to take.
About the Author:
Jenny Lane is a banking specialist who writes on related financing and banking
industry topics. Find out more about the latest in banking industry at
http://bankingtrends.com
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