3 Factors that Affect Mortgage Rates

A number of factors can potentially impact how much interest you’ll pay toward mortgaging a home, such as: inflation, economic growth and housing market conditions.

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Below are 3 factors that affect mortgage rates:

Inflation
Let’s start with inflation, which is the phenomenon where the prices of common goods and services rise across the board. Consistent and moderate inflation is actually a sign of a healthy economy, and should ideally result in a proportional rise in wages for workers as well. For lenders, inflation poses an inherent problem — it means that the money people borrow now will be worth less when they come to pay it back. If economists predict a rise in inflation, investors will insist on higher mortgage rates to make up for this loss. Source: Money.HowStuffWorks

Economic Growth
High levels of economic growth generate higher incomes, more investment and increased consumer spending. The expectations of economic stability drive prospective homeowners into the mortgage market. The increased demand for mortgages generates upward pressure on rates in reaction to the limited supply of loanable funds. The opposite is true during periods of slower economic growth in which spending, investment and income decrease, drawing potential homeowners away from the mortgage market. Consequently, the decrease in demand for mortgage borrowing places downward pressure on mortgage rates. Source: Homeguides.SFgate

Housing Market Conditions
Trends and conditions in the housing market also affect mortgage rates. When fewer homes are being built or offered for resale, the decline in homes being purchased leads to a decline in the demand for mortgages and pressures interest rates downward. A recent trend that has also applied downward pressure to rates is an increasing number of consumers opting to rent rather than buy a home. Such changes in the availability of homes and consumer demand affect the levels at which mortgage lenders set loan rates. Source: Investopedia

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