If you have applied for a mortgage loan in Greater Boston, you would have noticed that the interest rates of loans seemed to change frequently on the whims of some inscrutable force. In reality, the interest rates change due to a myriad of factors, but some of the important ones are economic changes that we can readily identify. As the economy around us changes, the interest rate will also change.
image by Wikipedia
Economic Factors which Control the Interest Rates of Different Mortgage Loans
Good Economic Factors = Increased Mortgage Interest Rates
Bad Economic Factors = Decreased Mortgage Interest Rates
- Inflation: Inflation is defined as “the increase in cost of different goods and services” i.e. the depreciation of the buying power of our dollars. Inflation affects mortgage lenders since the money they will receive from borrowers (along with interest) may have a lower value than the amount initially lent. So depending on economists’ predictions on inflation over the years, the interest rates will be either increased or decreased to make sure lenders don’t end up taking a loss in the future.
- Growth Rate of the Country: This factor indirectly and directly affects the interest rate of a mortgage loan in Greater Boston. As a country grows, and its economy becomes better, inflation will rise, thereby affecting the interest rate directly. In a more in-direct manner, because of the law of supply and demand, the interest rate will change depending on two factors: the demand for mortgage loans among the public and the number of investors who are ready to lend. Usually the rates will increase as the country grows, since the demand for mortgage loans among the general public will increase while the supply of mortgage loans usually remains the same. In a similar manner, if the country enters into a recession, the demand for mortgage loans will decrease, which will cause the interest rates to decrease to attract customers.
- Real Estate Market: The law of demand and supply also plays a role here. If demand is high and the supply is low, the cost of real estate will naturally increase, and this will increase the amount which is borrowed in the form of mortgage loans, which will again cause the interest rate to change. Vice-versa, the rates will decrease if the demand is low and supply is high.
- Federal Fund Rates: If the Federal Reserve increases the federal fund rates, it will make borrowing money much more costly. This will in turn lower the supply of money and lower inflation. As a side effect of this change, the interest rates on mortgage loans will also change.
As you can gauge from the above descriptions, the factors which affect the rates of a newr mortgage loan in Greater Boston (or a Boston refinance loan) are many and complex. While a full explanation on the issue is out of scope of a humble blog update, hopefully the above will demystify the topic, take some of the apparent invisibility and magic out of it, and help us be more confident when considering mortgage loan rates in Boston or Greater Boston.