Interest Rate Changes and How They Help Home Buyers

March 5, 2021


Interest Rate Changes and How They Help Home Buyers

Curious how interest rate changes impact homebuyers? There are two primary types of mortgage loans, fixed-rate and adjustable-rate mortgages — with some hybrid forms and combinations and different derivatives of both. Understanding the basic types of interest rates, as well as the ways in which the economy influences the future of these interest rates, can help you make smart decisions when it comes to buying a home. 

How the federal funds rate impacts mortgages

The federal funds rate acts as a benchmark for the most affordable loans available — but the relationship with mortgage interest rates is a bit more complicated. Let’s look at some historical rates to help put this in perspective. 

Between the years 2009 to 2015, even as federal funds were constant, mortgage interest rates varied slightly month-to-month. For instance, in 2009, the average 30-year fixed mortgage rate was 5.04 percent. In 2011, this rate dropped to 4.45 percent in 2011, dropped again to 3.66 percent in 2012, and then rose slightly to 4.17 percent in 2013. 

While this may not sound like a significant difference, when it’s compounded over the lifetime of a 30-year mortgage, those fractions of a point can quickly add up. If you borrowed $250,000 at 4.17 percent interest, the interest payments over the life of the mortgage are $188,541. If you borrowed the same amount at 4.45 percent interest, the interest payments would total $203,365 — meaning you would spend more than $14,000 additional in interest on the same loan. Interest rate changes can have a huge impact. 

Forecasting changes to interest rates

If you are trying to anticipate interest rate changes on adjustable-rate mortgages, take a look at the shape of the yield curve. This curve represents the yields on United States Treasury bonds with maturities ranging from 3 months to 3o years.

When the shape of the curve is flat or trending downward, you can expect the Federal Reserve to keep interest rates steady or even lower them. Conversely, when the shape of the curve is trending upward, you can expect the Federal Reserve to raise future short term interest rates. 

You can also look at the steepness of the curve, in either direction, as an indicator of how much you can expect to see the interest rates raise or lower. 

The bottom line regarding interest rate changes 

Having a solid understanding of what influences mortgage rates is a great first step toward making financially sound decisions when shopping for a mortgage. For instance, it can help you make the best decision when choosing between a fixed and adjustable-rate mortgage, or even help you decide when the time is right to refinance your current adjustable-rate mortgage. 

All of our Reali agents are experts in the areas they serve. They’re here to support you through the entire process, from search to negotiations, throughout the paperwork process and closing. Any questions? Contact us today to learn more.

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