Mortgage rates can have a significant impact on the overall cost of purchasing a home through financing. They fluctuate depending on several economic factors and can change multiple times a day. It’s important to know why mortgage rates may fluctuate so you can understand how changes affect affordability and the cost of your mortgage.
Mortgage rates are ultimately determined by a combination of market forces, including:
The Economy: A strengthening in the economy can cause mortgage rates to increase as capital is in demand. In slower economic periods rates often go down. Aside from the natural ebb and flow of the economy, rates can be affected by the Consumer Price Index, the Producer Price Index, and the real estate market.
Economic Forecasts: Mortgage lenders will often analyze economic data to forecast economic growth and contraction in the short and long term. Through forecasting, mortgage lenders can gain insight into how interest rates are likely to behave and can accommodate economic changes like inflation. Lenders can adjust their rates to keep up with inflation.
Money Supply: The Federal Reserve monitors the amount of money flowing in and out of the economy to control inflation. They try to manage inflation by raising and lowering interest rates and buying Treasury bonds to inject more cash into the economy. When there is more money in the system, interest rates tend to drop to encourage more economic activity.
Mortgage Market Conditions: Mortgage lenders can monitor the construction and sale of new homes in the area to determine the supply and demand. If sales and construction increase, lenders often predict the demand for mortgage borrowing will increase. This can drive mortgage rates up.
World Events: Domestic and global events or politics can help or hurt investor confidence. This can spark changes in interest rates.
How to Get a Good Mortgage Rate
To increase the chances of getting the best mortgage rate, consider the following tips:
- Check your credit report for and correct any errors you find.
- Get loan estimates from at least three different lenders. Consider the rate as well as the estimated closing costs.
- Make a down payment of 20%. This can help you secure a lower rate and save on interest and private mortgage insurance over the life of the loan.
- Negotiate the rate with your lender. If you have a high credit score, this may give you some leverage.
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