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How Do Mortgage Interest Rates Affect The Economy?

By Jim Micheals

Asking how mortgage rates affect the economy is in essence asking the wrong question. Mortgage rates can affect the flow of the housing market and encourage or discourage people from buying new homes, but the factors involved are broader than that. The correct question to ask is how mortgage rates affect the economy in general.

How Mortgage Interest Rates Are Determined

Mortgage rates are determined by the federal government selling long term treasury notes. These notes are sold to the highest bidder. When the loan matures, the government pays back the face value of the note and the interest on it. Mortgages backed by treasury notes all have fixed rates.

High mortgage interest rates can keep people from buying homes or dissuade them from longer term interest rates. Lower interest rates may affect an individual’s savings account as well. Interest rates have a much broader impact on the economy than simply encouraging or discouraging home buying.

How the Government Uses Mortgage Interest Rates

Interest rates control the flow of money into the economy. Too much money can cause an inflationary cycle and too little causes deflation. When the Federal Reserve wants to stimulate buying, it will lower the interest rates. If buying becomes a problem, it raises the interest rates. The trend over the last twenty years has been to lower interest rates.

The current credit crunch has caused the interest rates to move slowly in either direction. Even if people want to borrow money, the banks are currently reluctant to lend. The mortgage rates will stay fixed until the confidence of the large banks returns. The crisis will continue for the foreseeable future. This is good news for people who can borrow money, as they can get extremely low mortgage rates. Many others will have to wait.

Related posts:

1. How Does A Slow Economy Affect Mortgage Refinance Rates?
2. How Will Hyper Inflation Affect Mortgage Interest Rates?
3. How Do Treasury Bonds Affect Mortgage Rates?
4. How Do Mortgage Interest Rates Affect Bonds?
5. How Do Federal Rate Cuts Affect Mortgage Refinance?