Buying a home is one of the most important decisions and most expensive investments most people will ever make. To finance a home, lenders such as banks offer mortgage loans that allow home buyers to spread out the cost of the home over many years while making agreed upon monthly payments of principal and interest. The interest rates charged on mortgages can vary widely over time, affecting the overall cost of those monthly payments. What causes mortgage interest rates to go up and down?
Supply and Demand
Like any consumer product, mortgage rates are affected by supply and demand. This controls the interest rate of mortgages on a fundamental level. When many people are seeking mortgages to buy homes, lenders can charge higher interest rates. When the economy is moving more slowly and there are fewer buyers, lenders may be forced to reduce interest rates to attract borrowers. Supply and demand keep mortgage interest rates in a constant state of flux.
The Federal Reserve Board
The Federal Reserve Board, also known as the Fed, uses its power to change certain key interest rates as a way of controlling economic growth. It is good to understand that the Fed doesn’t actually set mortgage rates. Instead, it determines the federal funds rate, which generally impacts short-term and variable (adjustable) interest rates. When the Fed raises the federal funds rate (the interest rate banks charge each other for short-term loans), often to stem inflation, mortgage rates rise as a result. On the other hand, when the Fed slashes interest rates to stimulate growth in a slow economy, mortgage rates have a tendency to drop, making them more affordable to home buyers. Mortgage rates are also influenced by the Fed’s monetary policy, which includes both the federal funds rate and buying and selling of government securities such as bonds.
For an individual home buyer, mortgage interest rates may be largely impacted by the buyer's credit score and overall credit worthiness. Lenders are reluctant to offer loans to borrowers with a poor credit history. To attract more low-risk borrowers, they can offer low-interest mortgages to qualified borrowers with high credit scores, steady incomes and job stability. Borrowers with poor credit may be forced to accept a higher mortgage interest rate or look into government-sponsored programs that target buyers who are unlikely to qualify for or be able to afford a conventional mortgage.
Global factors impact the U.S. economy, which also affects mortgage interest rates. Political unrest, increasing foreign competition, unemployment, fuel and food costs, anything that threatens or bolsters the U.S. economy, can influence the cost of borrowing money.
Lenders offer two general types of conventional home loans (mortgages): fixed-rate and adjustable-rate. The first is a fixed-rate mortgage. Fixed-rate mortgages have a single interest rate that lasts for the life of the loan. The second type is an adjustable-rate mortgage, or ARM. These mortgages include terms that specify when, and how often, the lender may change the interest rate. By definition, home buyers who opt for an ARM can expect to experience fluctuations in their mortgage interest rate. After the initial fixed-rate period ends (for example, 5 years), the interest rate on an ARM moves up and down based on the index it is tied to.
Small fluctuations in interest rates can have significant effects on costs for homebuyers. According to the latest data released on March 14, 2019 by Freddie Mac, today’s mortgage interest rates are at their lowest in over one year. At 4.31 percent, the average 30-year fixed mortgage rate is at its lowest since February 2018. These low rates will certainly get the attention of prospective homebuyers!
The home financing process can be confusing. That is why Evergreen Homes has assembled a group of highly rated Preferred Lenders with significant experience and success in all types of home financing as a resource for new home buyers. We encourage you to reach out to them if you have any questions regarding financing a new construction home in Canton, MI.