Predicting Current Mortgage Rates

Many economic factors affect the rate of mortgages. There are those who say that you cannot predict future mortgage rates. However, there are several factors that affect mortgage rates and that can help you determine a fair percentage.

Economic Influences on Mortgage Rates

The first factor is inflation. When inflation is high, banks must charge a higher interest rate to cover the changing value of money over time. Presently, the Federal Reserve Bank has cut the prime rate to new lows --the rate at which the government changes banks to borrow money. Commercial banks can then lower the interest rates they charge to commercial and individual clients, including home mortgage loans. The control that the Federal Reserve has over the prime rate is called monetary policy and is, perhaps, the government’s greatest leverage over the economy. In theory, low prime rates should encourage borrowing. Conversely, if the economy and inflation are both soaring, the Federal Reserve Bank can increase the prime rate in an attempt to stem inflation. The other government leverage on the economy is fiscal policy (tax policy and budget allocations). Stable inflation rates tend to encourage lending institutions since they perceive to be sheltered from the eroding forces of inflation on their capital loans.

The current low-inflation situation stands in stark contrast to the 1970’s when annual inflation soared into the double digits, forcing banks to charge extremely high interest rates to secure fixed rate benefits to compensate for the changing value of money over time. Mortgage rates are, in part, a function of the Federal Reserve Bank’s prime rate; knowing the prime rate will give you a good indication as to what mortgage rates will likely be.

Market conditions also affect the rate of a mortgage loan. Credit markets for home loans typically function in the following way. An originating lender will negotiate a mortgage with a borrower. After the terms of the mortgage have been settled and the contract has been signed, the originator will often sell the loan to a secondary financial institution, so that the originator can remain liquid and continue to do what it does best; negotiate and make mortgage loans. The secondary market is characterized by companies like Fannie Mae and Freddie Mac, as well as large financial institutions. These secondary companies then aggregate these outstanding capital notes into what are called mortgage backed securities, which are bought and sold in capital markets.



If investors anticipate that the economy will be performing better than now than in the future, they will delay purchasing mortgage-backed securities. If, conversely, they perceive that the economy will deteriorate, they will purchase as many mortgage-backed securities as possible at the current rate of return, which they feel will be higher in the future. Therefore, the timing of your loan will play an important role in determining your rate of interest.

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