Mortgage financing grants entry into real estate. Mortgage interest rates affect housing demand because most homebuyers lack the resources to transact in cash. Familiarize yourself with interest rate trends to save money and manage risks.
The Federal Reserve Board
Interest rates fluctuate according to loan demand. The Federal Reserve Board coordinates monetary policy in response to economic conditions. The Fed works to lower interest rates during recession to encourage investment. Conversely, the Fed seeks to raise interest rates amidst growth periods to manage inflation. Mortgage rates adjust accordingly to Federal Reserve monetary policy.
Fixed and Adjustable-Rate Mortgages
Mortgage interest rates may be either fixed, or variable. Fixed interest rates carry the same level of interest throughout maturity. Adjustable rate mortgages (ARMs) begin with a low “teaser” rate and adjust in the future towards prevailing interest rates. ARMs generally adjust after either three, five or seven years.
Personal Finances
Personal income levels and assets, alongside the size of the mortgage, determine creditworthiness. Less creditworthy customers pay higher interest rates in exchange for higher risk levels.
Misconceptions
Banks do not jointly adjust mortgage rates at specified dates. Interest rates move irregularly and strategy varies between banks with respect to mortgage offerings.
Financial Risks
ARMs are especially risky. ARM payments may become difficult to afford when rates increase.
How Banks Set Mortgage Rates, Sources:
The Federal Reserve Board: Purposes and Functions
Federal Trade Commission: Mortgages / Real Estate
Investopedia: Adjustable-Rate Mortgage
