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Mortgage Interest Rates: Why Do They Rise & Fall?

December 13, 2021 — 5 min read

Like most things in life, mortgage rates have their ups and downs. But why do interest rates fall and then come back up? How do you know when to get the best mortgage interest rate? This mortgage interest rate guide will help you understand more about getting the best deal on your home purchase.

Interest Rates in the U.S. Economy

If you follow the news even a little bit, you'll probably notice occasional stories about interest rates rising or falling. When interest rates in the USA fall, they generally do so because the Federal Reserve has cut the federal funds rate, which, according to the Brookings Institute, is "the rate banks pay to borrow money from each other overnight." This may seem like a very specific piece of information, but it's actually an important economic indicator. However, you don't need to fully understand what it means to make sense of the impact this has on mortgage interest rates rising or falling.

When the federal funds rate goes up, it gets more expensive for banks to loan money. When that happens, borrowers need to pay more interest. So if you hear about the Federal Reserve, or Fed, cutting or raising rates, you can expect that to have an impact on the rates mortgage lenders can offer. The fed makes these rate cuts or raises in order to balance out the U.S. economy. When the COVID-19 crisis struck in 2020, the Fed cut rates in order to mitigate the damage the pandemic caused to the economy. This made it cheaper for people to borrow money.

It's no coincidence that these cuts lined up with historic-low mortgage interest rates in 2020 and 2021. If it's cheaper to borrow money, mortgage lenders can offer loans at lower interest rates, which makes it easier for people to buy houses or refinance their existing mortgages. This, in turn, gets more money moving through the economy. That, in a nutshell, is why mortgage interest rates rise and fall.

Older couple using a laptop while reviewing paperwork at home

Understanding Mortgage Interest Rates: The Basics

When it comes to the mortgage interest rate you can expect to pay, though, there's more to the story. When you're planning to purchase a home, whether for the first time or the fifth it's important to think beyond the national economy. That's because the APR you end up with will be based on factors beyond the Fed's interest rate.

In fact, the mortgage interest rate you pay is just one part of your final APR, or annual percentage rate (the amount of interest you pay on your home loan). Your APR will also include various charges, like mortgage points or other fees associated with your specific loan.

Beyond that, though, low national interest rates won't necessarily translate to a low mortgage interest rate for every homebuyer. Personal finance factors like your credit score will also have a big impact on your final rate. That's part of the reason why personal financial literacy is so important for homebuyers. If you set yourself up for success on things like your credit score and financial history, you'll be in a better place to take advantage of interest rate cuts when they come about.

How to Get the Best Mortgage Interest Rate: Buy When You're Ready

The fact that personal finance plays a part in your interest rate actually means that the ups and downs of the economy may be less important than they seem. That's not to say that it doesn't matter at all, but it's best to think about homebuying in terms of when it's right for you rather than being tied to the national economy.

For example, if you know interest rates are low but your finances just aren't right to cover the costs of homeownership (including the hidden costs beyond your monthly mortgage payment), it's fine to wait. Homebuying is a major decision that will have a huge impact on your life, so you don't want to base your decision too much on external factors like interest rates.

Instead, it's best to focus on your personal readiness. If you've made the decision to put down roots where you're currently living, that's a good sign that it's time to buy. You'll also want to make sure your finances are at their best. If at all possible, pay off debt, build up credit and create a positive payment history with your bills.

Happy Couple playing with dog while sitting in doorway at new house

The bottom line: Don't let national news rush you into a decision you aren't ready to make. Interest rates will continue to go up and down over time. This means that if rates are a bit high when you're ready to buy, you can think about a variable-rate loan, or simply plan to refinance -- so long as interest rates are favorable.

Remember, too, that you can talk to your Mortgage Advisor if you're concerned about rates when you're ready to buy. Your Advisor will help you find the best loan option for your needs based on where you are today, not what you may have missed out on in the past.

Buying a new home is all about taking the next steps in your life and creating new possibilities. Even if you don't get one of the best mortgage interest rates in history, you'll still end up with a financially beneficial asset in the form of a home of your own that accrues value over time.

Want to learn more about how economic factors impact home buying, or what you can do to make sure you're ready to buy a house at the optimal time in your life? Get in touch with your local PacRes branch today.

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