When purchasing a home, you’re more than likely going to need a mortgage to assist you with the purchase. A main factor that determines the long term financial commitment of your mortgage is the mortgage’s interest rate. Interest rates can fluctuate based on many different external factors. Some fluctuations happen quickly while other times mortgage rates remain more stable over time.

Economic Growth
One major factor in determining mortgage rates is economic growth. The economy will grow and fall based on many different factors including natural disasters, wars and other major events happening throughout the country. During times of economic growth the number of home buyers will typically increase creating a higher demand for mortgages. This will in turn increase mortgage rates. On the other hand if the economy is on the decline, mortgage rates will begin to fall due to reduced demand.

Inflation
Another factor that comes with a growing economy and that can cause mortgage rates to fluctuate is inflation. Inflation happens when prices increase causing the purchasing value of a dollar to drop. This slows the economy. When this happens mortgage rates will rise because fewer people are able to afford to purchase homes.

Housing Market Conditions
A third factor that indirectly causes mortgage rates to fluctuate is the condition of the housing market. When the housing market is in a seller’s market there is a higher demand for mortgages. With fewer homes on the market either being built or re-sold this will cause mortgage rates to rise. On the other hand during a buyer’s market when there is plenty of inventory and less buyer demand, mortgage rates tend to decrease.

The Federal Reserve Board
The Federal Reserve Board is the central bank of the United States and collects economic information to make decisions about how money is allocated. With this economic information the Federal Reserve Board will determine how the money supply needs to fluctuate to stabilize the economy. Although the Federal Reserve Board can not directly change mortgage interest rates, their decisions have a trickle effect. For example if the money supply is increased there is downward pressure put on interest rates, and if the money supply is decreased there is upward pressure on interest rates. This is done in an effort to either stabilize the number of homebuyers by increasing mortgage rates, or spark economic growth by decreasing mortgage rates.

If stock market volatility is keeping you awake at night, you may want to consider adding income property to your portfolio.

Let’s look at an example:
If you purchased a three bedroom property for $130,000.00 and put 20% down on a thirty year mortgage, then your monthly payment including principal, interest, taxes, and insurance could be expected to be about $800.00 a month. Considering that rents in desirable areas of greater Lansing can run between $1200.00 and $1400.00 per month, this can be a very good investment.

In addition to the potential of cash flow from real estate investments, there is also an opportunity to build wealth through price appreciation (or as the price of properties increase from what you purchased them at) and 1031 exchange opportunities down the road.
While the stock market is expected to continue to be volatile, many individuals are choosing to move investment dollars into hard assets that can be part of a balanced investment portfolio.

1. Know about exclusions to coverage. For example, most insurance policies do not cover flood damage as a standard item. This type of coverage must be bought separately.

2. Know about dollar limitations on claims. Even if you are covered for a risk, there may be a limit on how much the insurer will pay. For example, many policies limit the amount paid for stolen jewelry unless items are insured separately.

3. Know the replacement cost. If your home is destroyed you’ll receive money to replace it only to the maximum of your coverage, so be sure your insurance is sufficient. This means that if your home is insured for $150,000 and it costs $180,000 to replace it, you’ll only receive $150,000.

4. Know the actual cash value. If you chose not to replace your home when it’s destroyed, you’ll receive replacement cost, less depreciation. This is called actual cash value.

5. Know the liability. Generally your homeowner’s insurance covers you for accidents that happen to other people on your property, including medical care, court costs, and awards by the court. However, there is usually an upper limit to the amount of coverage provided. Be sure that it’s sufficient if you have significant assets.