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If you’ve paid even the least bit of attention to real estate news lately, then you know that mortgage rates have been rising. It’s what everyone is talking about. These rising mortgage rates have such a huge impact on the economy, many are concerned about how high the rates will go and the impact the increase will have. With the sudden chatter about increasing mortgage rates there are many people wondering what exactly is causing the increase. There are several different factors that have an impact on mortgage rates.
The money that comprises a mortgage comes from several different sources. While some of the money comes from bank deposits, a vast majority of it comes from investments in capital markets. Capital markets are those where stocks and bonds are traded.
In a capital market, there are sellers and investors. The sellers offer the investment instruments, or products, and investors purchase these products expecting a return. Investors are looking for products that have a high return. Of course, investors will only put so much money towards those products that have a low return.
When demand for certain investment falls, the sellers increase interest rates to attract investors to their products once again. In the case of mortgages, the market must please both the investor, who is looking for a high return on investment, and the homebuyer, who is looking for a low interest rate. When interest rates start to fall, investors aren’t interested in putting their capital towards mortgages anymore because the returns are not beneficial for them.
With most other investments, there is a general idea of how much supply there will be. However, with mortgages, there is no way of knowing you many new mortgages will be originated. Supply can vary greatly from day to day. When there is high of a supply of mortgages, and not enough demand from investors, interest rates must rise to attract investors.
This was the case in the most recent rise in mortgage rates. There was a quick drop in rates that lasted a few years. During this period of time, more and more people were creating new mortgages and refinancing their existing mortgages. The supply of mortgage bonds shot up, creating a higher supply than investors could absorb. Subsequently, mortgage rates had to increase so investors would once again invest in mortgage bonds.
Inflation also has an impact on mortgage rates. When inflation increases, mortgage rates subsequently increase to continue to provide returns for investors. With a 2% inflation rate, a 5% mortgage is really providing 3% return to investors.
Many people believe that the Federal Reserve mortgage rates. However, this is just a myth. The Federal Reserve only suggests a rate at which banks borrow from each other. Even this rate is a mere suggestion; the lender bank will still determine the rate at which it charges a borrower bank.
As you can tell, there is much that goes into mortgage rates. The mortgage rates you see today are a combination of supply, demand, inflation, and competition among instrument sellers.
Keywords: Mortgage Rates
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