Understanding Interest Rates – What’s Causing Rates to Rise?

According to a recent lender survey completed by Bankrate.com, mortgage rates have been steadily increasing each week since the beginning of the year climbing to its highest mark since March of 2017. But what’s causing these rate increases and, more importantly, what does that mean for potential homebuyers?

Much like anything having to do with the financial industry, there are a number of factors that affect rates, including:

Economic Growth & Inflation

When consumer spending, borrowing, and business investment increase, this creates an up-swell of economic growth which, in turn, puts pressure on the supply of free currency that is circulating. When there is an increased demand on this supply of money it causes competition between borrowers looking to make use of the limited funds.

This growth creates inflation (an upward change in prices), which then places additional pressure on the economy. To counteract the reduced spending power caused by inflation, lenders increase rates.

The Housing Market

Much like other industries, mortgage rates react to changes in the supply and demand for housing. Increased demand for homes can sometimes increase when the supply of available homes or money do not increase to meet it.

Treasury Bonds & Federal Funds Rates

The federal funds rate is the base rate from which other interest rates are determined and is related closely to inflation. If the Federal Reserve increases the federal funds rate to curb inflation, the prime rate(a low interest rate offered to low-risk borrowers) is also increased and increases in the prime rate are then passed on to other rates in turn.

Additionally, in order to avoid financial losses from regular economic changes and the market, lenders will often link mortgages to the yield on the 10-year Treasury bond. As mortgages are considered long-term financial investments, mortgage lenders tend to use the yield on the 10-year Treasury an general estimate as to the direction of long-term interest rates.

So what’s the takeaway from all this?

With positive economic growth factors causing consistent increases in interest rates, those thinking about buying or refinancing should begin the process sooner rather than later.

As always, every situation is different and each rise and fall of interest rates are the outcome of a huge variety of different stimuli, including the factors listed above.

When you’re ready to start the home buying or refinancing process, it’s important to have someone who has the experience, background and market knowledge to help you make the best decisions for your situation.

If you have any questions about interest rates, give us a call at (602) 912-0222!