How the Economy Has Affected Mortgage Rates


During the past few years we’ve seen the housing market take a plunge downward as lower mortgage rates have remained in place, while the economy has desperately tried to recover. Recently there has been a slight increase in the mortgage rates and buyers are wondering if the rates will continue to increase. One of the largest factors that influence mortgage rates as a whole is the state of the economy. As a general rule, when the economy improves, the rates increase and during a recession the rates decrease.

The State of the Economy
Inflation plays a critical role in all of this movement, working with supply and demand. In an up economy demand is high and the price for supply increases. In a slow economy supply is abundant with very few buyers. Over the past years as the economy has continued to worsen, the mortgage rates have remained at an all-time low. Recessions are responsible for decreased real estate sales, which results in fewer mortgage loans being financed by the banks. As an incentive to buyers, the banks are offering lower rates to motivate buyers into purchasing a home. When it comes to the economy, it’s similar to a game of dominos; each move greatly impacts the next.

Government Response
Government intervention is another factor that can’t be overlooked. During recessions, the Federal Reserve’s prime lending rate is lowered and passed on to the banks. The banks take advantage of the lower lending rates from the government and offer those savings to the buyer in the form of a lower mortgage interest rate. Lower rates are intended to improve and motivate the economy. The reverse happens during inflation, the Federal Reserve’s prime lending rate is increased and passed on to the banks, which in turn pass it on to the home buyer. The intent with increased rates is to slow down the rate of inflation balancing the economy.

What we Can Expect in the Future
What’s the future look like for mortgage rates? The best advice is to watch the housing market, which has hit the bottom according to analysts. That means mortgage rates will increase overtime and if you have the resources to purchase a house, this can be a good time to do so. Mortgage rates are at their all-time lowest and if the economy improves the mortgage rates will follow and increase as well. The speed of rate increases will be much slower in the future than we have seen in the past, which is one reason that many has lost the fear of housing prices falling any further.

If owning a house is still your dream, making this purchase is one of the best lifetime investments possible. In addition to purchasing the house of your dream, be sure to compare home insurance rates as well.