What You Should Know About Mortgage Rates and the Market

If you have a home loan – or if you’re looking to take one out – perhaps the biggest thing to consider is mortgage rates. The interest rate that you pay on your loan significantly affects the total cost of the loan: every point counts.

How do mortgage interest rates affect you? 

Let’s look at it this way: say you have a $500,000 home loan, you’re paying 4% interest on that loan per year, and the loan is on a 30-year term. You’ll pay around $359,000 in interest alone over the loan term (assuming you’re making monthly payments and interest is compounding monthly). Now, say you have the same loan but your interest rate is 3.75%. You’ll pay around $334,000 in interest – that’s $25,000 less. And if your interest rate was 4.25%? That’d cost you about $385,000 – $26,000 more, thanks to compounding interest.

In the above example, $51,000 hangs in the balance of just a 0.5% change in interest rates. That’s a pretty compelling reason to know and understand how interest rates work in the greater market, and to lock down the lowest rate that you can. Pro tip: you can calculate how much interest you’ll pay for your specific circumstances with our Mortgage Calculator.

Who sets interest rates?

The US Federal Reserve (a.k.a. the Fed) sets the “federal funds rate”: the benchmark rate at which all other US interest rates are based on. If that rate is high, your mortgage rate will likely be high – and if it’s low, so too will your mortgage rate be. But how does the Fed decide what that benchmark rate will be? That depends on the greater market.

Interest rates and the market

It’s the Fed’s job to control the economy. Its objective is to keep GDP growing, workers employed, and “inflation” – the rate at which the prices of goods and services rise – within targeted levels. The federal funds rate is one of the tools it uses to do that: when the economy is booming and inflation is ticking up, the Fed usually hikes rates. This makes borrowing more expensive and saving more attractive – mortgage rates, along with all other interest rates, will rise. That, in turn, discourages spending, allowing the economy to cool. 

When the economy isn’t looking so hot, on the other hand, the Fed typically does the opposite: it lowers interest rates so borrowing becomes cheaper and spending more attractive (the idea being that this stimulates the economy).

Why should you know all this?

If you understand why, when, and how interest rates change in different economic environments, you can make informed decisions about your mortgage rates. For example, if you think the economy is on a tear and interest rates will likely rise, you might want to fix your mortgage rate. That way, if interest rates do rise, your mortgage rate won’t – and you’ll save money. On the flip side, if you think things are looking glum and interest rates will likely fall, you might want to be on a variable mortgage rate. Then if they do fall, your rate will fall too – again, saving you money.

As you can see, interest rates are a hugely important consideration for anybody with a mortgage. Firstly, your mortgage rate will directly affect the total cost of your loan. Secondly, if you can understand how interest rates work, you can make better financial decisions about your home loan. If you’d like to know more – or nab yourself the best mortgage rates in the market – get in touch with UW Funding today.

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UW Funding

Mortgage Under Management

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