Factors Which Determine Interest Rates

Posted by on Thursday, August 18th, 2011 at 5:31pm.

The world of mortgage is indeed complicated. And the sudden rise and the fall in the rate of interest in mortgage loans have added more complexity to it. In fact it is because of extremely complicated series of relationships between several factors which determine the mortgage rate. The Fed, the market, the inter bank rate of interest and of course, people’s willingness to spend money, determine the rate of interest on a mortgage loan.

Before delving into what determines mortgage rates, you need to understand the market itself. It is to be kept in mind that from the point of view of both the lenders and the home buyers, mortgages are nothing but investments. If you are a home buyer, you view mortgages as investments. Again, from a lender’s point of view also, mortgages are investments. Suppose a lender provides a mortgage loan of $100000 at an annual simple rate of interest of 5% to a home buyer. Here the lender will receive an annual payment of $5000.

Now, as long as there in only one lender in the market place, he/she can charge prettily high rate of interest. However, if there are many lenders in the market, offering mortgage loans, the rate of interest associated with mortgage loans will come down because of increased competition. If the rate of interest on mortgage loans goes to very low levels, buyers will look for other form of investments where chances are more to obtain higher rate of interest.

Again, suppose a lender has certain amount of money with him/her. Now as the number of home consumers who want to borrow the money rises, the lender can charge comparatively higher rate of interest. In other words, more home consumers imply higher rate of interest. Apart from these, these are many other factors which influence the mortgage rates which include the expected yield by the investors, number of investors in the market, number of dwelling buyers in the market and many other things.

Apart from these, of course, there are banks, lending institutions and the FED which are responsible for influencing the rate of interest on mortgage loans. It is not the case that banks and the lending institutions sit together and do all the mathematical works themselves to calculate the interest rates on mortgage loans. Many a times, it has been seen that mortgage rates are pegged to some other rates. One such index is the interest rate associated with US Treasury bonds. Some times, the mortgage rates are kept slightly higher than the rate of interest on mortgage loans. Since the US Treasury bonds are secured whereas there are chances of default in case of mortgage loans, generally the rate of interest associated with mortgage loans are higher than the rate of interest on US Treasury bonds.

15 Responses to "Factors Which Determine Interest Rates"

John Evan Miller wrote: Considering that the 30-year-fixed mortgage interest rate is down to 4.15% and consumer confidence is tanking, this was a great article to write this week. Great post.

Posted on Friday, August 19th, 2011 at 3:09pm.

Carmen Brodeur wrote: The current mortgage rates are at historical lows. Anyone who can qualify for a mortgage should be taking advantage of this.

Posted on Wednesday, August 24th, 2011 at 6:56am.

Adam Shamus wrote: This is supposed to be the most difficult time to get a loan, but I have been pleasantly surprised by the ability of people to get a loan lately. I think lenders are looking at people's history prior to them losing their jobs or their home value plummeting. It's really "the" time to buy. I don't know that interest rates will ever be this low again.

Posted on Friday, August 26th, 2011 at 6:13am.

Ashlee wrote: Loans are at unthinkable low rates! Best time for buyers who are on the fence to jump!

Posted on Monday, August 29th, 2011 at 9:40am.

Kevin Hughes wrote: It seems like historically low interest rates are going to around for awhile thanks to the Fed. Combined with the lowest home prices seen in years, buyers do have a unique opportunity.

Posted on Monday, August 29th, 2011 at 9:40am.

Janice Bovee wrote: Interest rates are historically at the lowest interest rates that they have ever been. In Philadelphia it is now cheaper to buy than to rent.

Posted on Tuesday, August 30th, 2011 at 12:32pm.

Noemi wrote: Getting a loan can be sometimes hard but after all the hassles its all worth it. Interest rates are not that high compared to what is seems to be. Great time to grab it!

Posted on Sunday, September 4th, 2011 at 8:30am.

Ariel B. wrote: Now is definitely the time to buy Real Estate! Interest rates are at an all time low and home prices still down. We will probably never see an opportunity like this again in our lifetime.

Posted on Saturday, September 10th, 2011 at 9:45am.

Rich Cederberg wrote: Great explanation of some of the factors behind the interest rates, it's really quite complex. Rates continue to be low, let's hope everyone takes advantage!

Posted on Monday, September 12th, 2011 at 9:55am.

John Mas wrote: The housing market is in a slump, but don't blame interest rates. Mortgage rates continued a downward trend this years so fingers crossed!


Posted on Friday, October 7th, 2011 at 10:13am.

Chris wrote: Interest rates being low is great for home buyers that can actually get financing... (which isn't too many!) Banks lending guidelines are tight!

Posted on Wednesday, October 19th, 2011 at 6:38am.

Bill Gassett wrote: Most people don't realize that much of how interest rates are determined besides the government increasing liquidity is by what investors in the bond market are doing. The interest rates today are absolutely amazing!

Posted on Wednesday, December 7th, 2011 at 8:12am.

Jackie wrote: Interest rates are tied to the rise and fall of U.S bonds. Mortgage rates can also be influenced by political unrest or global political and economical crisis.

Posted on Monday, December 19th, 2011 at 7:22am.

Seattle Homes wrote: Interest rates will more than likely skyrocket just before election; this is only opinion, however, it seems anything else related to housing goes up with political debates and elections.

Posted on Monday, December 19th, 2011 at 7:22am.

Anita Clark wrote: We have seen incredibly low interest rates this year, historically low, yet many consumers refuse to get off the fence. Good post and comments!

Posted on Saturday, December 31st, 2011 at 4:06pm.

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