It can seem like the interest rates on your mortgage are determined by chance or some otherworldly power, but this is simply untrue. Analysts work hard to determine the cost of borrowing, and that information makes the services your mortgage company offers possible. So what do mortgage companies look at when deciding what to charge for their money?
The 10 Year Treasury Bond Rule
The 10-year treasury bonds are the best indicator of fluctuations in mortgage rates. These investments are direct competitors for the same investment capital. Most mortgages are issued at 30-year amortization schedule but are usually paid off or refinanced every ten years. That means that an investor who places money in a mortgage is likely to see the maximum returns in about same period of time as that 10-year bond.
Investors put their money towards the investments that produce the most positive gain. When treasury bond rates increase, it means that lenders must charge a competitive interest rate to secure enough capital for mortgage loans and services.
The Money Supply
The amount of money in the economy has a direct impact on the cost of borrowing. When there is a lot of money and it is easy for banks to get, it makes it more difficult to earn profits from lending. They must lower the rates they charge for all loans. The lower rates encourage a higher volume of borrowing to make up the difference in profits. This is why governments often attempt to influence an economy with changes in monetary policy.
Mortgages are a financial product. Like all other products and services, they are impacted by the laws of supply and demand. A lender wants to work with stable borrowers and offers the rates that are competitive but profitable. When houses are in higher demand than supply, a higher mortgage rate is common. The opposite is true when there is surplus of housing.
Getting the best mortgage rate available helps you to afford a better home, but the timing is critical. Talk with your broker about your options.