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Generally, rates follow the economy. When the economy is growing, there is a higher demand for credit, so rates rise. Conversely, when the economy is slowing, the demand for credit decreases and in turn lowers the interest rates. It is common for inflation to occur when the economy starts to grow at a fast pace. Inflation is when the cost of goods and services are increased due to a stronger demand when the economy is good. When the economy grows too quickly, the Federal Reserve acts to slow the economy and reduce inflation by increasing rates.
In addition to the general economy's effect on mortgage interest rates, other types of interest rates also impact mortgages. Examples include the Prime rate, Treasury Bill rates (T-Bills), Treasury notes, Treasury bonds, Federal funds rate, Federal discount rate, LIBOR (London Inter-bank Offered Rate), 6-Month CD rate, and 11th district cost of funds. The fluctuations of these and other worldwide economic rates can greatly affect fluctuations in our domestic mortgage rates.
Also contributing to the change in mortgage rates are monthly reports that show how the economy is changing. These reports cause rate to move depending on what they illustrate. Some of them affect our rates more than others. Unemployment reports are a good example. In the instance of a reported lower unemployment rate, the economy is assumed to be getting stronger because employers are hiring more employees. This growth causes rates to move upward. On the other hand, if the unemployment rates increases, then the economy is worsening which will result in lower rates. A few other examples of these report are Consumer Price Index (CPI), durable goods ordered, Gross National Product, home sales, housing starts and Producer Price Index.
Fixed mortgage rates tend to follow the 10 year Treasury note price and yield. There is an inverse relationship between them. This means that when the bond price moves up, mortgage rates move down and vice versa. Adjustable mortgage rates tend to follow short-term action taken by the Federal Reserve.
As you can see, interest rates change according to a host of factors. Since interest rates and the economy reflect human activity, it is virtually impossible to forecast future interest rates. Even though forecasting future interest rates is difficult, there are trends to notice. It is always a good idea to contact a financial advisor or mortgage professional when it come to making decisions that may impact your life for up to thirty years.
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Pat Williams Senior Vice President Certified Residential Specialist ERA American Realty of Northwest Florida, Inc. 1270 N. Eglin Parkway Shalimar, Florida 32579 Cell Phone 850-585-4062 pat@era-american.com |