Why Do Mortgage Rates Change?

September 23, 2022
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Everyone knows that mortgage rates change over time, but it can be hard to know why if you are not aware of how mortgage rates are determined. There are some key reasons that loan rates have to change, and many big forces are at work behind the scenes that cause these changes. You do have some factors that you can control, such as your credit file and score, your debt-to-income, or your loan-to-value ratio. The rest of the picture related to mortgage behavior is risk-based pricing and the base rates that are set by the Fed.

Prime rates are what drive the base rate for mortgage lending. This is the rate at which banks borrow from one another. The cost to borrow these funds can fluctuate over time, but the increases are always handed on to the consumer. This is one of the main drivers that will dictate loan rates, but there are other things that change the way that rates behave over the course of any given year. Mortgage rates are driven by many different factors, and it can be hard to know which is the primary factor behind rate hikes without doing a bunch of research.

If you are ready to learn some more about mortgage rates and how they can change, you need to keep reading for more information about this process.

What Does the Prime Rate Mean?

The Prime Rate is the cost of the money that banks are borrowing in the first place. This money is what is bought to be loaned to homeowners looking for home loans. When the Fed increases the prime rate to cover their costs for loaning out money, the cost to consumers looking to buy homes in increased. The changes to the Prime Rate impact the profit margin that can be made by servicing loans, and it needs to keep pace with the changing real estate and economic market.

Inflation also impacts the Prime Rate. Mortgage rate increases in relationship to cost hikes throughout the entire US make sense to most people. Everyone can tell when the cost of fuel goes up, or the cost of groceries increases, and they might be able to understand that mortgage rates will increase as well. Inflation causes rates to be increased to prevent tipping into a recession. The Prime Rate offers the base rate system that is used to prevent this downfall.

How Does the Economy Impact Mortgages?

The overall economy impacts the climate of mortgages as well. The overall economy is impacted by world markets as well as the other various large industries that influence it directly. The mortgage and banking industries are not the sole pressure that leads to changes in the mortgage reality for everyone looking for homes to buy and finance. There are changes to the rates and the interest that banks can make when they loan each other money as well, and this can impact the overall mortgage reality within the larger economic whole.

The entire picture of spending that is going on in the country at any time is not the only factor that will drive rates up or down. Mortgages are offered by banks to make money, and the rates that they charge must be high enough that there is a profit to be earned for loaning money to other banks or to consumers. When the cost of everything goes up, rates must also go up to accommodate the shift in spending and the need to be profitable with loaned dollars.

Timely lending is important when people are looking at mortgages in a market that are slowly increasing rates to make up for inflation. You do not want to have to wait for weeks to get your mortgage finalized because the rates can go up during this time and impact every part of the lending process. If rates increase exponentially during your waiting period as you look around for the right loan, you might not be able to afford to pay for your home.

Different Property Types Can Require Different Mortgages

One of the other factors that can greatly impact your mortgage rate is the kind of property that you are buying. Small single-family homes might be considered lower-risk and therefore be offered much more favorable mortgages than larger homes or properties that are made for special use. When you are financing a smaller amount, you will also be offered a shorter mortgage term, which can help you get your property paid off right away.

There are many different factors involved in the property selection process that can cause spikes in your interest rate, which you might want to avoid. The more you are able to shop within your budget, the better off you will be when it comes time to secure a mortgage.

The Right Lending Tools Can Make All the Difference

If you are concerned about rising interest rates impacting your ability to be able to afford a home loan, you need to be sure that you are working with a skilled mortgage broker. Having the ability to shop around to various lenders from a single application can save you a lot of time and can make it much easier for you to connect with the loan that you need for your finances. Getting the best rates, as well as the right loan stipulations and contingencies, can be much easier with a skilled mortgage broker working on your side.

At Perch, we can help you to get connected with the loan that you have been looking for, and we can do so promptly. You will not be left hanging while rates climb and climb, and you will be able to trust that you will get the most for your investment when you work with us. We can offer you access to various mortgages that might fit your needs perfectly so that you can pick and choose the right loan. Being sure that you can lock in the interest rate that you have been looking for is key when you are considering buying a home.

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