Apparently, it may seem that the lenders increase or decrease the mortgage rates as per their wish and business considerations. But, in actual practice practice, determination of mortgage rate is not that easy. It involves complex interplay of several factors. Here we discuss about some major factors that determine the mortgage rate. The list is not at all exhaustive. But, surely gives some elementary ideas on the dynamics of mortgage market.
1. Inflation
Inflation is an economic phenomenon which depicts an increase in the general price level of goods and services over a period of time. Rising price level means that each unit of money can purchase less units of goods and services. In other words, rising price level implies that the purchasing power of money declines. Expectations of rising future price level means that money that you borrow currently will be worth less when you repay it in future. In other words, the amount of money that the lenders receive in future will be worth less. Lenders make up for this rising prices by increasing the mortgage rate. On the contrary, if the rate of inflation is slow, lenders keep low mortgage rates.
2. Gross domestic product
Gross domestic product (GDP) indicates the final value of the goods and services produced in a country in a particular period of time. When the GDP rate is low, the Federal Reserve lowers down the rate of interest to give a boost to business units and the general public to borrow more so as to give a new impetus to the economy. On the other hand, when the GDP growth rate is already high, it means that there is too much money floating around the economy. This in turn jacks up price level. To contain the rising inflation rate, mortgage rate is then increased.
3. Federal Reserve
The Federal Reserve is the organization which is responsible for the monetary policy in the country. It is the the apex bank in the country and it is the bank to the government as well as the bank to the whole banking system. When the Federal Reserve engages in the purchase of long term US Treasury securities, mortgage rate of interest declines. On the other hand, when the Federal Reserve stops purchasing long term US Treasury securities or sells US Treasury securities, mortgage rate of interest increases.
4. Individual credit rating
In addition to the above discussed macro economic factors, one important micro economic factor that influences the mortgage rate is your credit standing. If you have a clean credit and perfect credit score, then the lender may agree to offer you a mortgage loan at a better rate. On the other hand, if you don't have a good credit score, you may not be offered a loan at all or you you may be offered a loan at a very high rate.
These are some micro and macro economic factors that determine the rate on a mortgage loan. However, this is not an exhaustive list. Mortgage rate determination is very complicated and it is influenced by several factors.