Economics and Mortgage Rates

If you’re interested in buying a home, you may be asking yourself: Is it a good time to buy? When mortgage rates are at historic highs, home prices are on the rise, and inventory is tight, it can feel like it might be time to wait things out.

However, there’s a better question you should be asking yourself — is it a good time in YOUR life to purchase a house? While housing market trends provide important context, your financial situation is unique. Your life goals and readiness to become a homeowner will have an even bigger effect on when it’s the right time to start your homebuying journey.

Even when market conditions are less than ideal, you should never let them get in the way of your personal progress. You might be able to use economic turbulence to your advantage and drive down the asking price. Or, buy now and refinance later at a lower rate. You have options!

Still, it’s always important to know what’s going on in the wider world of home finance before making any decision. So let’s review some important factors affecting mortgage rates, current market trends, and what you need to ask yourself before you put down roots.

How are mortgage interest rates determined?

Mortgage interest rates have a big impact on the total long-term cost of financing a home. While a borrower’s financial health affects the interest rate they’ll be offered on a loan, there are a couple different economic factors, and even government policies, that affect the universal mortgage rates. By understanding these factors, you’ll know why interest rates fluctuate and what could be coming in the future.

Economic factors affecting interest rates:

Inflation

Though inflation reflects the increase of prices in the overall economy, it’s a critical factor for mortgage lenders to consider. Recent stubborn rates are a result of the Federal Reserve’s determination to bring annual inflation back down to 2%. The high interest rates are generally because of a policy response to the rising inflation. Once inflation decreases sufficiently, interest rates can be lowered.

In general, lenders have to maintain their interest rates at a level that’s sufficient enough to overcome the erosion of purchasing power. That way, their interest returns a real net profit.

Interest rates and recessions

For the most part, the economy grows until interest rates are hiked to assist in cooling down price inflation and a skyrocketing cost of living. This results in the onset of a recession, and subsequently, interest rates are lowered to stimulate growth.

Historically, interest rates typically fall during recessions. While there is no way to tell what will happen in the future, if the economy enters a recession in the near future, you can expect interest rates to be reduced and spur a trend of borrowing, spending, and growth.

Individual factors

Though borrowers can’t influence average rates, there are things within your control that could make a big difference in how much you can save when buying a home. Start by shopping for the best deal. Research multiple mortgage lenders before committing. Use this mortgage payment calculator to help crunch the numbers and determine what monthly mortgage payment you can afford.

At the end of the day, despite market trends and temperatures, you have to look at your own life goals, finances, and interests to determine if you’re ready for homeownership. Ask yourself these questions:

• Are you financially prepared?
• How is your job security?
• How long can you see yourself living in one location?

A mortgage is a big commitment, but the more you know, the better prepared you are to dive into the process. By researching the right options and tools, you can turn the dream of homeownership into reality.