One of the most common questions we get asked is what factors into the mortgage interest rate we present clients. There are quite a few factors, some in the client’s control and others not. Some of the factors that the client can influence are their credit score and debt-to-income ratio. Those are factors the client can work on improving to qualify for a better rate.
The other factors, the ones the client has no influence over, are what we will be discussing today.
It’s no secret that prices tend to go up over time. Mortgage lenders consider inflation when setting interest rates because the rate has to be high enough to maintain a profit over the life of the loan.
One great example of inflation affecting interest rates is from 1972-1983. During that period of time in the US, inflation was unusually high, causing interest rates to spike to 18.53% in 1981! As a reference point, the average interest rate for 2018 is around 4.6%.
The Job Market
When the job market is healthy and growing, interest rates trend upward. This is because the demand for mortgages tends to rise when the job market is doing well. Well, that and a strong job market often indicates inflation in the near future.
The Federal Reserve
The central banking system of the United States, The Federal Reserve, aims to maintain low inflation and foster economic conditions to promote employment.
“The Federal Reserve influences mortgage rates indirectly by buying or selling Treasury bills. It influences rates directly by affecting the spread between Treasury yields and mortgage-backed securities.” – Tendayi Kapfidze, chief economist for LendingTree.
Generally, when the Federal Reserve buys more securities, interest rates fall and when they sell securities, interest rates rise.
The Bond Market
Many lenders like us choose to bundle the mortgages we originate and investors buy them as Mortgage-Backed Securities (MBS). MBS is one kind of bond investment, similar to US Treasury bills and corporate bonds.
Of all the bonds, US Treasury bills are considered the safest. MBS tends to have a higher rate and historically have risen and fallen alongside the US Treasury bills.
While our clients may not have complete control over lowering their mortgage interest rate, we still encourage them to be pre-approved up to a year before they want to buy. This time allows them to raise their credit score and lower their debt-to-income to qualify for the best rate possible. If you’re ready to begin the mortgage process, start by filling out our online application.