While interest is inevitable with any loan and should definitely be considered part of the cost of doing business, that doesn’t mean that you should take the first interest rate offered. You know that interest rates depend on your credit history and financial status, but a number of other related factors also influence interest rates. If you keep your eyes open for the right opportunities and buy at the right time, you can save yourself some money. Take a look at five major influences on the market that affect mortgage rates.
High levels of unemployment are rarely thought of as a good thing, but there are bright spots here and there for those who aren’t personally unemployed. One of those bright spots is the availability of lower mortgage interest rates. When high numbers of people are jobless, less people are able to make large purchases, and the banks don’t make as much money because they’re lending less. Therefore, interest rates drop as a means of encouraging people to buy again. If unemployment is up, it’s a good time to buy.
When you notice the prices of goods and services rising, interest rates will rise along with them. This is known as inflation, and it occurs when money starts to lose its value. When you’re shopping for a home, you should stay alert for predictions of inflation by financial investors. Often, just the fear of inflation is enough to drive up interest rates, because lenders want to make sure that they’ll receive enough of a profit back from their investment, and the less the dollar is worth, the higher the interest rate they’ll need to make that profit.
The GDP (Gross Domestic Product) is an indicator of how the country is doing financially. You should be aware of the GDP and of how fast it’s moving when you go shopping for homes. A slowly rising GDP means that economic growth is slow. This may indicate economic troubles in the country, but it’s a good time to shop for a home, because the Federal Reserve cuts interest rates when things are slow, to increase the number of people borrowing and spending money. This increase in spending can be an important boost for a shaky economy.
On the other hand, if the GDP is increasing too rapidly, that’s a sign that there may be a bit too much money in the economy. Too much money can lead to inflation, and one way to head that off is to raise interest rates until things stabilize.
When it’s time to set an interest rate, the banks often look to 10-year Treasury Notes for an indicator of where the interest rates should be heading, and you should too if you want to get an idea of whether you’ll be looking at higher or lower interest rates. Treasury bonds and mortgage securities are related because they compete for the same investors. However, treasury bonds have the advantage of being 100% guaranteed, which mortgages do not. However, mortgages have a higher interest rate, which means more profits. To stay competitive, mortgage interest rates have to increase as the 10-Year Treasury Note interest increases, which is why bankers look to the treasury not when choosing mortgage rates.
Unforeseen Tragedies and Disasters
By definition, it’s impossible to predict when an unforeseen tragedy will strike, and you certainly shouldn’t sit around waiting for one to shop for a mortgage. But if you are already hunting for a mortgage when a natural disaster or geopolitical tragedy strikes, it may work out to your advantage. The market tends to panic when an unanticipated major event occurs. When that happens, investors move their money to the safest investments possible, and some of those investments or mortgages. A sudden influx of investors and money can cause mortgage interest rates to drop.
When you know what to look for to predict the mortgage interest rates, you’re better able to make smart financial decisions – like deciding if it’s really the best time for you to buy a home. Lower rates may mean that it’s time to stop being cautious and strike while the iron is hot, while higher rates may suggest that you should wait awhile. The information for this article was provided by the professionals at USDA Loans Direct who specialize in USDA home loans.