Getting a mortgage is an important life decision, and whether you’re purchasing your first home or your next, you should have all the necessary financial information before making any decisions. One of the most important aspects of any mortgage is the interest rate, which is made up of many contributing factors. Understanding what influences mortgage rates can help you make an informed decision during the home buying process. The factors include:
Inflation
Over time, there is a steady rise in prices for goods and services, which can decrease your purchasing power. In a situation where inflation is rising, interest rates will generally rise with it, so you can expect your potential mortgage rates to be higher. In the current economic environment, inflation is beginning to return to pre-pandemic levels during which inflation remained low. This leveling to a healthy level of inflation means a general rise in the cost of goods and an expectation that mortgage rates will follow.
Rate of economic growth
Generally, when the economy is growing and in good health, your purchasing power increases. However, there becomes a supply and demand factor — as more borrowers are competing for mortgage loans, rates can move higher.
Federal Reserve’s monetary policy
One of the most influential factors affecting interest rates is the Federal Reserve Bank’s monetary policy, which allows the Fed to control the money supply by raising or lowering short-term interest rates in reaction to what is happening in the economy. The Fed has set rates low right now, which means mortgage rates are very affordable, despite hot housing markets in many cities.
Housing market conditions
It is important to stay up-to-date with the current trends in the housing market as they play a role in influencing your purchasing power. When rates are low, the demand for housing can increase. For example, in 2020 there was a very rapid demand for housing brought on by the pandemic. The fact that more people were working from home created a small housing boom with a shortage of inventory that drove housing prices up. If interest rates were to increase, it may artificially push you out of the price point you originally desired.
Shop with confidence
The amount of information to gather when buying a home can be overwhelming. With mortgage rates varying from lender to lender, being aware of these factors can help you decide on the right lender and interest rate for your situation. Learn more about mortgages or speak with one of our experienced mortgage advisors to guide you through the process so you can feel confident about your purchase.
