Home Loan Rates Respond to Simple Supply and Demand
Home loan rates follow the simple concept of supply and demand. When demand goes up, home loan rates do too. More home loan buyers, or borrowers, trigger home loan sellers, or lenders, to command higher rates for their mortgage products. Likewise, when demand goes down, home loan sellers reduce rates to attract more buyers. You can extrapolate this scenario to the general state of the economy. More people apply for mortgages when the economy is strong, and home loan rates go up. A weak economy conversely scares consumers away, and home loan rates go down.
Inflation also drives home loan rates. Higher inflation typically reflects a strong economy. When the economy grows too rapidly, the Federal Reserve increases interest rates in order to slow things down a bit and reduce inflation. Again, a strong economy drives the prices for goods and services higher and home loan rates higher because demand for these products is higher. Home prices also rise, home buyers are forced to apply for higher mortgages, and lenders charge higher home loan rates on those higher mortgage amounts. However, since home loan rates are influenced by supply and demand for home loans specifically, those rates may fluctuate differently from interest rates in general.
During those times when home loan rates rise, many homeowners refinance to obtain lower rates. Refinancing can be a particularly smart move during a time of rising home loan rates if your current mortgage has an adjustable interest rate. If you are one of them, research carefully before jumping in. You may be able to refinance to another adjustable rate mortgage if that will lock in lower introductory home loan rates than you would obtain if you were to opt for a fixed rate mortgage that starts off at a higher rate.