Why Do Mortgage Rates Change?
One of the most frustrating things for home buyers is how quickly mortgage interest rates can change. If you’re currently in the process of buying a home or refinancing, it’s worth understanding why it happens. The first thing to know is that rates are driven by a multitude of factors. One of the benefits of working with us is that we can shop dozens of lenders to find you a competitive rate; however, keep in mind that there are other significant factors besides interest rate alone that will impact your time and costs:
Annual Percentage Rate (APR) - this is the total cost of the loan after taking into account the fees in the mortgage. Sometimes borrowers get lured by a low interest rate and don’t realize that their fees are actually increasing their overall costs.
Overlays - Overlays are additional underwriting requirements above and beyond what Fannie and Freddie Mac require to become qualified. These often feel arbitrary and are a point of frustration among borrowers and mortgage loan officers alike.
Servicing - After your loan is closed, you will begin making payments to a servicing provider. If you ever have issues making mortgage payments, you will want to work with a service provider that is known for high quality customer service.
Ok, so now that is out of the way, let’s dive into the real reasons mortgage interest rate can change. Some of the most common factors that can influence mortgage interest rates include:
Economic conditions - Mortgage interest rates are often influenced by the overall state of the economy. When the economy is strong and growing, mortgage rates tend to be higher because lenders can afford to charge more for the money they lend. When the economy is weaker and there is less demand for loans, mortgage rates tend to be lower.
Inflation - Inflation refers to the general increase in the price of goods and services over time. When inflation is high, mortgage rates may also be higher because lenders want to be compensated for the loss in purchasing power of the money they lend.
Federal Reserve policies - The Federal Reserve, also known as the central bank of the United States, has the power to influence mortgage interest rates through its monetary policies. For example, if the Fed raises its target interest rate, mortgage rates may also go up. However, it should emphasized that a change in target interest rate is not always strongly correlated to a change in mortgage rates.
Market conditions - Mortgage rates can also be influenced by supply and demand in the mortgage market. If there are more borrowers looking for loans than there are lenders willing to lend, mortgage rates may go up. Conversely, if there are more lenders than borrowers, mortgage rates may go down.
Creditworthiness of borrowers - Lenders use credit scores and other financial information to evaluate the creditworthiness of borrowers. Borrowers with higher credit scores and stable incomes may be able to qualify for lower mortgage rates.
