Why Mortgage Interest Rates are on the Rise

2018 has been the year of rising mortgage interest rates. The interest rate on 30-year fixed-rate mortgages is near 5 percent, which is the highest since 2011. So, what is the primary reason why mortgage interest rates increase? The short, easy answer is no one single event causes rates to rise.

However, there are significant forces at play, such as inflation and what the Federal Reserve does with the benchmark interest rate, that causes mortgage rates to spike. Here is a brief look at why mortgage rates are on the rise recently.

Inflation
Among its many duties, The Federal Reserve is in charge of curtailing inflation. One of the steps The Fed take is to raise the benchmark interest rate. This is the rate banks charge when they borrow money from each other. When the Fed raises rates, it typically signals an imminent rise in mortgage rates. For example, In September of this year, the Fed raised the benchmark rate by 25 basis points (one-quarter of one percent). It was the highest increase since April 2008. When the Fed raises rates, it has a trickle-down effect on consumers and how much it costs to borrow money, including mortgage rates.

Strong Economy
Unfortunately, a strong economy and low unemployment cause interest rates to rise on virtually all borrowing. As demand rises for lines-of-credit, mortgages, personal loans and installment loans rises, so too does the interest rates banks and lenders charge. It may not seem to make sense that rates rise in a strong economy, but the reality is that markets dictate whether interest rates rise or fall.

The Housing Market
The state of today’s housing market also has an effect on mortgage rates. According to most housing experts, it is a seller’s market. This means buyer demand is higher than the total homes available for sale. Additionally, there is not enough new construction or inventory to keep up with current demand. This trend could ultimately lead to a sharp decrease in mortgage rates as demand for mortgages starts to fall. If there is not enough available inventory to satisfy current demand, potential homebuyers may start to drop out of the home buying process and choose to rent.

Many factors caused mortgage interest rates to rise recently. Inflation fears, rising wages and the Federal Reserve tightening economic policy all had an impact on rates. 2018 saw the lowest unemployment rate in 49 years, and the news certainly had an impact on rates across the board.

From http://leonbelov.com/why-mortgage-interest-rates-are-on-the-rise/