5 Factors that will Affect Future Mortgage Rates
5 Factors That Will Affect Future Mortgage Rates
Mortgage rates can be affected by a large number of factors ranging from the internal economic situation to the external one, including financial crises and recessions at a worldwide level. Since these factors are so important, those who consider contracting a mortgage loan should be fully informed before making the final decision. This requires a lot of research work and getting advice from the best financial analysts.
What does the concept of mortgage loan imply?
A simple definition of the mortgage loan reveals the fact that this is the type of loan secured by a real estate property. The person who contracts the loan guarantees that he can pay back the money he gets with the property. This allows the lender to apply lower interest rates than in the case of other types of loans.
What are the variables that influence the mortgage loan?
- Size of the loan. This is one of the major factors that determine the overall costs of the loan. There are many things that determine just how much one can borrow, including the value of the real estate property with which the loan is guaranteed, the income of the borrower and of the co-payers included in the contract and so on.
- Maturity of the loan. Most people who have never contracted a loan before do not know what terms like maturity mean. In fact, things are quite simple, as the maturity of the loan is actually the time it takes for the loan to be repaid. The maturity date is the final payment date of the mortgage loan or other types of loan in general. There are virtually two types of loan maturity: the fixed maturity loan and the no maturity date loan. In the case of the fixed maturity loan, the loan is due to be repaid on a fixed date established in advance when the contract is signed. The no maturity date loans are also known as perpetual stocks and allow the loan to continue indefinitely. There is also the possibility of serial maturity date loans. In this particular situation the bank issues several bonds with different maturity dates.
- Interest rate. The interest rate can vary considerably from company to company and is established according to some criteria stipulated by the laws and regulations of the state but also by the laws and regulation of the lender.
What is the situation of the mortgage business in the US?
Most mortgage loans in the US come with fixed rates. The fixed rate loans account for almost two thirds of the total in the US, in the case of 30-year loans, and other 15% in the case of 15-year loans. Only a small percentage of the mortgage loans have adjustable rates.
Things have changed a great deal in the last years in the mortgage business environment in the US. If, in the past, almost anyone could contract a mortgage loan, nowadays everything is done following many rules and regulations that allow the banks to make safe and secure transactions.
Moreover, the population is no longer so willing to take risks by getting mortgage loans, because, due to the financial crisis, their jobs and consequently their income are no longer safe. However, the US Federal government encourages people to purchase their own homes by creating a good business environment for both the lender and the borrower.
With this purpose in mind, the Federal government created programs to foster mortgage lending by offering a guarantee on mortgage payments in the case of some loans. This way, the loans are secured and the interest rates are lower than normally. This encouraged the banks to lend more money to the population and the population to purchase their own homes even though they had to secure the loans with a real property.
Top 5 factors that are most likely to affect future mortgage rates
Even though there are numerous factors that are likely to affect mortgage rates in the immediate future, most of them cannot be completely predicted even by the best financial analysts. However, there are some of them almost all analysts agree upon:
- Fed Funds Rates. There is an ongoing debate whether the Fed Funds Rates influence the mortgage rates. Some say that one has nothing to do with the other, while other analysts say that they determine each other. The truth is somewhere in the middle.
First of all, the Fed is the one to set monetary policies. To make things a little bit clear, one should know that the Fed Funds Rate is the interest rate at which banks and other private depository institutions lend balances. The Fed lowers or raises rates as a measure of protection for the population, by controlling inflation through sustaining employment and stable prices.
The fact is that the Fed conducts operations only in what concerns the bank reserves. This is why it is believed that the Fed controls the mortgage interest rates only indirectly, because its monetary policy is in a way reflected in the monetary policy of the banks. If the banks believe that the Fed is no longer interested in controlling the stability of prices, which has consequences on inflation, they tend to be more cautious so that they do not lose money because of the impossibility of the customers to pay back to loans. Moreover, in case of inflation, the real properties that secure the mortgage loans are no longer as valuable as they were at the moment the contract was signed.
2. Credit score. This is something that has always affected the mortgage rates and will continue to determine it in the future too. Even though this applies to each individual, the credit score is something to be taken into account when applying for a mortgage loan. People with low credit scores will always have bigger interest rates because the bank needs something besides the real estate property to guarantee the fact that the one who contracts the loan is serious and can afford to pay back his debt. Even though at first sight the difference in the percentage is a small one, the truth is that this difference can mean thousands of dollars paid as interest for the entire period.
3. The down payment. This is another factor that will always affect the mortgage rate in the case of each individual. A bigger down payment doesn’t mean only a smaller sum of money one has to borrow, but a lower interest rate too. Why? Because a big down payment shows the bank that the customer is a serious one who is willing to do everything that he can in order to pay back the entire sum of money.
4. The internal economic situation. The economic situation of many countries nowadays is one of the major factors that determine the interest rates of the mortgage loans. Why? First of all, like in the case of the influence of the Federal Funds Rates, banks need to invest into something safe that can guarantee a profit no matter what.
With the crisis that has affected us in the recent years, banks are more cautious than ever and analyze all the internal factors before they go back to crediting the population. Even though the purchasing power of the population affects the economic growth directly, banks cannot afford to lend money to people who might lose their jobs in the near future.
Even if the loan is secured by the real estate property, if the population doesn’t have money, the property might not be valued by the bank. So, things move in a cyclic pattern until the internal economic situation allows risk taking for both sides.
The internal economic situation is affected also by natural disasters that seem to happen quite often nowadays. However, since all real properties that secure the mortgage loans are insured, the loss is often minimal.
5. Supply and demand. Things are pretty clear from this point of view: if there is a high demand the mortgage rates are high too because the banks can afford to say no to borrowers; if on the other hand the demand is reduced, the bank has to reduce the mortgage rates so that it attracts more customers. This strategy is one that has always been applied and will be applied in the future too.
These five factors are probably the most important ones that will affect the mortgage loan rates in the future. However, most of them are present nowadays too and influence the mortgage industry a great deal.
One thing is for sure: the mortgage industry in the US is one of the most developed ones at a worldwide level, because it is able to offer the population a wide range of mortgage services and repayment options. This flexibility offers banks access to many categories of borrowers. The mortgage bankers know that if they offer their services to the population they stand only to win. The demand increases and they can apply interest rates that turn their businesses into profitable ones. Because of that, it is in their best interest that the top factors that determine the future mortgage rates have mainly a positive influence.