Mortgage Interest Rates

With all the attention focused on the likelihood of an upcoming Federal Reserve interest rate cut, and the effect it may have on mortgage interest rates, we are repeating the blog from last November which looks at the history of mortgage interest rates and the thought process that affects our monetary policy.

If the Fed reduces their interest rate, will mortgage rates be reduced as well?  The Fed rate and mortgage rates are closely related, but they are not the same thing.  So a Fed rate cut will not result in an immediate mortgage rate reduction, but over time mortgage rates should improve as well.  Fixed rate mortgage interest rates are more directly influenced by changes in 10-year Treasury Bond yields.

A Look at Mortgage Interest Rates

John Andrews

As a real estate licensee since 1973, I have witnessed mortgage interest rates as high as 18% and as low as 2%.  This chart by Rocket Mortgage shows mortgage interest rates since 1971.

Who sets the rates and what factors affect their decisions?  The first part of the question is easy to answer – the people who are lending the money make that decision.  The second part of the question is more difficult to answer but supply and demand is a main underlying factor.  Other factors are (in simple terms):

1. Inflation – Lenders want to make a profit and if everything costs more, they raise the interest rate on the money they lend.
2. Economy – If the economy is booming, more people are making more money and buying more things, so the demand for mortgage loans is greater.
3. Monetary Policy – the Federal Reserve tries to adjust their rate to control #1 and #2.
4. Bond Market – Mortgage backed securities need to be attractive to investors and are affected by interest rates of the underlying mortgages.
5. Housing Market Conditions – Location, inventory levels, construction costs and availability of labor.
6. Competition – Lenders need to be competitive in the mortgage marketplace.  They keep up with each other.

Interestingly enough, whether the rates are 18% or 2%, the real estate business continues by adjusting to the given situation.  I can recall reverse amortization mortgages, split funding, wrap around mortgages, lease with purchase option, lease purchase and my favorite – owner financing. 

Contact us at the Andrews Team to discuss current market and financing conditions.