Understanding Mortgage Interest Rates

By Debbie Wilson
LoanPage.com Columnist

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Interest rate fluctuations are based on a number of important factors. In fact, it is virtually impossible to know for sure what interest rates will be since there are so many factors that must all come together before a rate can be published. But, by researching a few critical factors such as: government changes in federal funds rate, the U.S. stock market, and changes in U.S. treasury bills or bonds market, you can become an educated customer and more prepared to embark upon that new home loan.


Federal Funds

It goes without saying that the Federal Government keeps a constant eye on interest rates. That is because even the smallest fluctuation in interest rates can cause gigantic economic reactions. So how does the federal funds rate affect mortgage rates? Well, when the government raises the federal funds rate, banks raise their rates accordingly. Therefore, if you were to apply for a private new home loan, your rate would most likely be higher as well. Usually, the best rate you can obtain is 3% higher than the federal funds rate.

Stock Market

Interest rates can also change with fluctuations in the stock market. And while the stock market is probably too confusing to talk about as a whole, if you simply consider those stocks being affected by the federal funds rate, U.S. treasuries, and T-Bills, you can get a fairly good idea of how they affect your mortgage interest rate. In its most simplistic form, the federal funds rate is established based on whether the stock market is bullish (extremely optimistic) or a bear market (pessimistic).

U.S. Treasuries and T-Bills

Interest rates are directly affected by U.S. Treasuries and T-Bills. That is because as the price of a bond goes up, the ratio of percentage paid yearly on the bond falls, so the effective rate of return drops, and thus the interest rates drops as well. By watching what the 3, 5, 10, 15, and 30 year Treasury bond prices are doing, you can understand better what mortgage interest rates are doing. Keep in mind that although bonds are indeed a determining factor of interest rates, they only provide a range factor in determining your actual final new home loan mortgage interest rate.


About the Author
Debbie Wilson owns and operates a lakeside resort. Her previous experience includes profitability consulting for a national healthcare company. Debbie holds a B.A. in Business Management with a minor in Physical Education.

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