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What are the economic factors that affect mortgage rates?

Posted on February 24, 2010 by swiggs

This is an article that is something that will hopefully help you more understand why the dam interest rates go up or down, usually we only complain when they go up, as this directly costs us more money. Although written with a slight US feel, with the words federal, the principles are the same which is why i’d like to share this with you.
Mortgage rates are linked to the trends in financial markets and changes in economy. There are a number of factors that determine the home mortgage rates. The interest rates on home loans are affected by stocks, treasury notes and bonds, inflationary trends, actions of the federal government, international forces, etc. It is better to have an understanding of the changes that affect the loan rates before applying for a home loan.
Here are some of the factors that determine the interest rates on mortgages:

  • Federal Reserve discount rate: Federal Reserve Discount Rate is the cost that banks and other financial institutions are charged for borrowing money from Federal Reserve Banks. When Federal Reserve Banks increase the discount rate, it becomes expensive for investors to obtain money and hence they are not able to borrow much. As a result of this, the investors/lenders (banks and financial institutions) increase the rates they charge their customers for home loans.
  • Inflationary trends: Inflation reduces the purchase power of money and so lenders increase the interest rates on home loans during inflation. On the other hand, deflation tends to reduce the interest rates.
  • Stock market: The stock market plays an important role in determining the home mortgage rates. The stock market fluctuations affect the credit supply in financial markets and this in turn affects the home loan rates. As stocks go up, more money is invested in stocks. More investment may lead to less money invested on mortgage backed securities and this would increase interest rates on mortgages.
  • Treasury notes and bonds: The government often sells mortgages (packaged together with treasury notes and bonds) to investors. These are issued in financial markets as mortgage-backed securities. A higher demand for treasury bonds lowers the home loan rates.

There are certain other factors that affect the home loan rates. If international/ foreign investors put in money in the domestic financial market, the rate of interest on mortgages decline. Major fluctuations of dollar in foreign exchange market also affect the home mortgage rates.


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5 thoughts on “What are the economic factors that affect mortgage rates?”

  1. Suzanne Morrison says:
    March 12, 2010 at 5:42 pm

    Another good post. I posted a plug for this website at mine. So, I think many people forget the points you are discussing.

  2. Alethia Cihak says:
    April 15, 2010 at 11:16 am

    I am sure you have been told this before, but damn you have a very nice blog! I am jealous and hope I can create something as nice as you. I am sure you have been told that before, but seriously lol. Nice job and I will surely be back again. If you want to make some money with your blog definitely check out.

  3. folfox chemotherapy says:
    May 20, 2010 at 2:07 am

    Thank you for such a fantastic blog. Where else could anyone get that kind of info written in such a perfect way? I have a presentation that I am presently working on, and I have been on the look out for such information.

  4. custom design says:
    May 24, 2010 at 1:55 am

    Thank you for taking the time to talk about  this, I feel  fervently  about it and I enjoy learning about this topic.  Please, as you gain data, please add to  this blog with more information.  I have found it extremely useful.

    1. swiggs says:
      May 31, 2010 at 1:18 pm

      Thanks for your reply. I write as much as I can, but time is an issue sometimes.

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