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.