Whether you’re buying a home for the first time or thinking about refinancing your existing mortgage, you likely know that you want the lowest possible interest rate in order to minimize your long-term costs. Well, home loan rates change all the time — daily, sometimes hourly — and every borrower is different. But what’s behind mortgage rates? In part, decisions made by the Federal Reserve, the central U.S. banking system. The Fed doesn’t specifically set home loan rates, but its monetary policies do influence them.
How, why, and when do mortgage rates change?
The short answer is that rates are dependent on the economy. It will naturally grow and shrink, but the government can also do things that affect the economy in accordance with its desired policy outcomes. That’s where the Federal Reserve and its Board comes in. When the economy seems sluggish or is undergoing a recession, the Fed might cut interest rates to encourage borrowing and help spark economic growth. In what seems like a good economy, the Fed may want to hike interest rates in order to head off inflation. Banks take cues from the Fed, raising or lowering the cost of borrowing on each other (because banks loan each other money all the time). All of this ultimately trickles down to you, the prospective borrower.
Why mortgage rates fluctuate depending on your type of loan
Another factor that can influence your home loan rates? The type of loan. When buying a home, borrowers generally have options: A 30-year fixed rate mortgage, a 15-year fixed-rate mortgage, an adjustable-rate mortgage, and others.
As the name suggests, “fixed rate” mortgages mean that the interest rate does not change over the life of the loan. Once you’re locked into an interest rate on a fixed-rate mortgage, that’s your rate until the loan is paid off. The actual interest rate you wind up with isn’t just dependent on outside factors like the economy and the Fed, however; it will also depend your loan term, your down payment, and other factors.
If you’re shopping around for a mortgage — or perhaps thinking about refinancing — you might come across adjustable-rate mortgages (ARM) with generally lower initial interest rates. After a set amount of time called an introductory period, that initial interest rate could go up or down, or stay the same. According to a recent CNBC report, these types of mortgages might seem attractive in economic times when interest rates are rising because of the lower introductory cost. But borrowers should keep in mind that after that, the rate could fluctuate depending on a variety of factors, including the specific terms of your ARM.
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