How do Interest Rates Impact and are Impacted by the Economy?

Demystify the closing process, one question at a time.

Interest is the amount the lender charges in exchange for use of their capital. Buying a house with $100,000 in cash is not a realistic option for most of us. But when taking out a mortgage with reasonable interest rates, it allows us to make the large purchase of a house without having to have all the cash on hand. Other than your own financial history, there are many other factors that impact mortgage rates. One of the biggest factors is the economy as a whole. 

Factors that Impact Interest Rates 

• You
  • Your personal finances and credit score/history will impact the interest rates available to you. Your personal finances don’t impact interest rates as a whole, but it’s something to keep in mind when you’re shopping for your mortgage. 
• Fees 
  • The costs of upkeep for the lender (bank, credit union, etc.) are called “Originating fees”. They cover things like overhead and checks. 
• The Federal Reserve 
  • The Federal Reserve has certain controls over interest rates for other loans. In this case, the loans that lenders exchange with each other to ensure they have enough funds on hand to fulfill a loan. 
• Inflation 
  • As a consumer’s buying power goes up and down with inflation, interest rates adjust accordingly. 
• The Economy as a Whole 
  • A “good” economy usually means higher interest rates, while a “bad” economy tends to result in lower interest rates. 

Banks and other mortgage lenders don’t have an unlimited amount of money to loan out. Despite how big and deep their pockets may seem, there is still a supply and demand to consider. When more people are employed and making more money, the demand for mortgages is higher and the interest rates go up as a result. When economic prospects take a downturn, and less people are pursuing mortgages, the interest rates tend to lower. This is hoping to encourage people to borrow. 

When interest rates are lower, assuming you have the same income as when they were higher, you, the borrower, will have more purchasing power and can buy a bigger or more expensive house. But that all is impacted more by your personal finances, which at the end of the day is what you have control over. 

If you need help understanding the current mortgage interest rates you could qualify for, use this tool from Bankrate.

Ready to Close on Your House?

Georgia law requires a licensed real estate attorney at the time of closing. If you’re ready to close, give us a call at Frank B. Pallotta Law.