Interest rates have been historically low. However, now interest rates are rising. Here’s what interest rates are, why they rise and what that means for you and your goal of buying a new home!
What are interest rates?
An interest rate is an amount a lender charges to you, the borrower. In other words, this is how much it costs you to finance your home. An extra amount you must pay to your lender in addition to what you’ve borrowed. The interest rate will be part of your monthly mortgage payment.
Not that long ago, mortgages began being securitized. Basically, that means the mortgages are bundled up to be sold as bonds. These bonds are traded in markets much like stocks and, once you close on your mortgage, it will probably get bundled into a bond.
Next, financial institutions buy and sell those bonds. The price of the bond and its yield rate move in opposite directions based on how many people want (or don’t want) to buy bonds. For example, if people don’t want bonds it means the market has more sellers than buyers and the bond price goes down but the rate it yields goes up. Typically, when people are happy and optimistic, they buy stocks. However, when the news is bad, you’ll often see interest rates go down. At the time of this post, interest rates are rising.
Does the FED directly control mortgage rates?
The Federal Reserve does not directly control mortgage rates. So When you hear that “the Fed raised interest rates,” it means they’re working through specific channels in the banking system. Next, the markets respond accordingly. It’s this combination of the Fed action and the market reaction that drives changes in mortgage rates.
Why have the interest rates been so low lately?
Interest rates have been low for years. This is mostly because the Fed had used its tools to lower rates and keep them low. They do this to help prevent crises from happening or to prevent a current situation from getting worse. In today’s market, rates were pushed down and it has been hard to raise them again. That’s because they have to balance the fear of upsetting the economy with the need to get rates back to normal in case they needed to be lowered again in the future.
Why are interest rates rising now?
There are two main reasons interest rates are rising right now. First, the Federal Reserve is beginning to raise rates again because the economy is getting stronger. The second is inflation. Inflation means your money buys less – for example, something that cost you $1 in 1970 would cost you approximately $6.83 in 2021. And once markets are convinced inflation is coming, interest rates rise. To compensate for that, bond investors also want a higher interest rate, and mortgage lenders take their cues from the bond market when setting the rates they charge to borrowers. For even more detail on this question, you’ll find this article a great resource.
Beginning Your Homebuying Journey:
We hope you found this quick interest rate overview helpful. If you are looking to buy your new home in Southwest Florida, we hope you’ll call Neal Communities – Southwest Florida’s most trusted private homebuilder for over 50 years. We’re happy to help walk you through the homebuying process from start to finish—including the mortgage process. Please contact us today to learn more!
