How and why mortgage interest rates rise (or fall)

The rate on a mortgage loan is often the most significant factor in how much an owner will ultimately pay for their home. Monetary policy, market inflation, and the overall economy all play a part in determining when it rises and falls, according to Nerd Wallet. Currently, the United States is experiencing remarkably low rates by historical standards, below five percent in most cases, that contrast harshly with those in the high teens during the early 1980’s.

In this country, the Federal Reserve is the foundation of most of the traditional lending system due to their setting of the federal funds rate – the interest rate that banks must charge each other for short-term loans. This base rate then influences longer-term rates between banks, businesses, and personal borrowers like those looking for a 30-year mortgage. During times of expected inflation, the Federal Reserve is likely to raise these rates to protect the value of the dollar by keeping prices in check at the expense of increasing the cost of borrowing money for everyone.

These rates can have a compounding ripple effect throughout the economy as well, as businesses will be less likely to want to borrow money for investment when their interest payments become larger than the potential payoff. Slowing business can mean layoffs, suspended raises, and make potential home purchasers less sure about their financial future and ability to afford payments. Often, the housing market and overall economy will move through cycles of low-to-high interest rates that can be impacted by political changes, global events, and natural scarcity of resources.

Anyone in the market for a new home should be paying attention to the current mortgage rates as even a fraction of a percentage point can have a dramatic impact on how much they will pay over the life of the loan. Using a 30-year, $300,000 loan as an example, someone with a four percent interest rate will pay a total of $515,609 while someone with a five percent loan will pay $579,767.