What Are Mortgage Rates Based On?
Mortgage interest rates play a large role in home affordability. The higher the rate, the less home you can afford, and vice versa. When it comes to interest rates around the country, however, most consumers get lost in the mystery of what makes rates go up and down. Knowing how the national and local markets work determines the best times to buy and the best times to refinance.
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Supply and Demand
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Most national economic decisions are based on a very simple principle: supply and demand. When there are a lot of homes in inventory across the nation and a deficiency of active buyers to consume that inventory, mortgage rates will go down, as a result of more supply and less demand. Conversely, when there are fewer homes on the market than there are buyers competing for them, interest rates rise.
Market Conditions
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Market conditions tie into supply and demand somewhat. Market conditions are not just based on how much inventory is available in a given market, however; they are based on much more. Market conditions are based more on home pricing. For example, in markets where home builders are slashing prices and nearly giving homes away, this affects the conditions in the pre-owned market, many times forcing sellers to drop their prices in order to be competitive. Price reductions are a solid indicator that the market favors the buyers, and interest rates will drop to accommodate that favor.
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Federal Rates
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When reading the news, most consumers get excited to hear that the "feds" are going to drop interest rates. However, many times these rate drops are geared for home equity lines of credit and do not have a large impact on the mortgage market as a whole.
Stock Markets
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The stock market also plays a large role in determination of interest rates. When a national stock market is performing well and stocks are peaking in performance, mortgage rates will inflate. The reasoning behind this is that all loans originate from private lenders and banks. When their stocks are soaring, they can afford to drop rates. When stock markets aren't performing as well, banks can charge higher rates of mortgage interest to protect their assets when lending money to consumers.
Mortgage-Backed Securities
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Although these securities do have some impact on the stock market as a whole, mortgage-backed securities are bought and sold on a global scale. These securities are tucked away in investment portfolios allowing the general public to invest in real estate without having to own any parcels of land or property directly. When these securities are bought and sold (very similar to stocks) at high rates, the mortgage rates will decrease.
Treasury Bond Rate
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The bond rate for the U.S. Treasury does play a role in mortgage rates, however small. Because lending institutions are privatized, the Treasury cannot dictate what they can charge for interest rates. However, the Treasury can determine a "prime" rate that lenders base rates off of. Typically, the prime rate is 2 points above the bond rate for the Treasury. For example, if the rate of exchange on a U.S. Treasury bond that is purchased is at 4 percent, the prime rate would be 6 percent. This provides lenders with a guideline on their rates, but it is not a hard-and-fast rule.
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