It’s a common question we are asked: “How will you know when those rates are going to drop?” And while we cannot predict exactly when or where your quoted interest rate might change (or by how much), after awhile we have learned to follow a general sense of what rates are going to do. We use this knowledge along with the specifics about your particular loan to offer advice tailored for you on whether to lock now, or let rates float on YOUR loan.
However, because it’s such a common question we do want to explain some of the major forces which help determine the direction of mortgage rates as there are a few major factors that can cause them to rise or decline. You do not need to become an expert on the economy, but it can help to have a general understanding of these factors in order to protect yourself as a homebuyer or homeowner.
The Federal Funds Rate
The federal funds rate has a substantial impact on the level of mortgage rates and is defined as the interest rates that banks charge one another for loans. Each bank is required by federal law to have a minimum reserve of funds, and occasionally banks will need to borrow money from other banks in order to keep their reserves meeting this standard.
If the banks are required to pay higher interest rates, consumers are going to pay higher interest rates as well. Therefore a higher federal funds rate will normally mean a higher mortgage rate as well.
The Number of New Homes for Sale
Generally, you can also judge the future of mortgage rates by the number of new homes that are for sale. When there is a large increase of both the construction and the sale of new homes, this means that there is a large demand for new homes, and therefore a large demand for mortgage loans. When demand is high, so are the interest rates. If there are a lot of homes for sale, but no buyers, the demand is low, and therefore the mortgage rates will drop in order to encourage consumers to start buying again.
The Overall Global Economic Health
The overall state of the economy will give you a good indicator of how mortgage rates are going to change. The federal funds rate, for example, changes in response to changes in the economy.
For instance, if the economy is struggling (as it has been over the last few years), the federal funds rates will often drop in order to make loans and mortgages less expensive and more attractive to borrowers. This will encourage lending and borrowing, and hopefully stimulate the economy. As long as the economy stays soft, most likely rates will stay low.
However, once the economy begins to gain strength, mortgage rates will eventually start to go back up. But again it’s hard to determine exactly when this will be just as it’s hard to say exactly when the economy will be definitely considered “on the mend” as this is open to interpretation.
Get Specific to Your Situation
The truth is that while there are many “factors” or “indicators” as to what rates might do, none of that may have much of an impact on your specific loan situation. After all, every loan program is different and each loan has its own set of unique parameters. So even though rates might be changing, it may not impact your particular loan scenario.
Our best piece of advice is to speak to a lending professional about your specific situation and find out what makes sense for YOU. Pre-qualify and get a firm rate quote for a specific period of time, and you will be in a much better position to answer the question “should I lock this rate now or wait for them to get lower”.