Top 5 Market Factors That Influence Mortgage Rates

While there are several generic interest rate trend indicators online, the difference between what’s advertised and what’s actually attainable can be influenced at any given moment by at least 50 different market variables and with each individual loan approval scenario. Lenders set their rates based on the market activities of Mortgage Bonds, also known as Mortgage Backed Securities. On volatile days, a lender might adjust their pricing anywhere from one to five times, depending on what’s taking place in the market.

1. Inflation

Inflation is a rise in the general price levels of goods and services in an economy over a period of time. As inflation increases, or as the expectation of future inflation increases, rates will push higher. The contrary is also true. When inflation declines, rates decrease.

2. The Federal Reserve

The Federal Reserve is the central banking system of the United States. The aim of its interest rate policy is to either speed up or slow down the economy. In times of economic downturn, the Fed will cut rates to help create a boost. Conversely, in times of heavy inflation, the Fed will raise rates to help slow down the economy.

3. Unemployment

A decrease in unemployment will suggest that mortgage rates will rise. Every month, the Bureau of Labor Statistics releases the Nonfarm Payrolls, also known as The Jobs Report, which tallies the number of jobs created or lost in the preceding month. Some economists suggest we need 125,000 new jobs each month just to keep pace with population growth. So that’s a benchmark to look for if following this indicator.

4. Gross Domestic Product (GDP)

GDP is a measure of the economic output of the country. High levels of GDP growth may signal increasing mortgage rates. The Federal Reserve slashes short-term rates when GDP slows to encourage people and businesses to borrow money. When GDP gets too hot, there might be too much money floating around, and inflation usually picks up. So high GDP ratings warn the market that interest rates will rise to keep inflation concerns in balance.

5. Geopolitics

Unforeseen events related to global conflict, political events and natural disasters tend to lower mortgage rates. Anything that the markets didn’t see coming causes uncertainty and panic. When markets panic, money generally moves to stable investments, such as bonds, that bring rates lower. Acts of terrorism, tsunamis, earthquakes and fairly recent sovereign debt crises are all examples.

There has been a recent spike in mortgage rates that has caused some uncertainty, but let’s keep things in perspective. Mortgage rates are still at historical lows, so it’s still a great time to buy or refinance.

If you’re involved in a real estate financing transaction, it’s helpful to be aware of the major influences listed above or to rely upon the advice of a mortgage professional who is already dialed in. My team and I are dialed in and are always here to help.