The real estate market is a huge market that has an impact on the economy. Whenever you get a home loan, whether it’s a new loan or a refinance, you are given an interest rate that comes with the loan. The rate isn’t a standard rate across the board. It sometimes fluctuates, going very low or sometimes skyrocketing to what seems ridiculously high. So as a consumer, you may be asking yourself if you’re getting a good rate on your refinance. Refinance rates today are a direct result of economic conditions, as the rates of tomorrow will be.
Determining Refinance Rates Today
The economic state of the country fluctuates daily, monthly, yearly and so on. These fluctuations are constantly watched and monitored by financial experts who then give a forecast for what they assume the economic condition will be down the road. These forecasts aren’t 100% correct, but they are close enough that when a forecast is given, people listen. Interest rates are not only impacted by the daily fluctuations in the economy; the forecasts also impact them.
A mortgage lender is a businessman who needs to make a profit on buying and selling loans. So when the economic conditions change, his rates change accordingly. They have to if he wants to make money on the loans instead of paying for them. Typically when things start shifting and trends start to show a rise in the market, you’ll find the refinance rates begin to rise. The opposite occurs when trends show a downward shift. In reality, the market is much like a roller coaster, with constant ups and downs, twists and turns, and sometimes random jerks that send everybody scrambling to make it work. It’s important to realize that lenders do not raise or lower rates according to forecasted conditions alone. They study the flow of the market and adjust accordingly. However, these forecasted trends often give them an edge on the upcoming market conditions by telling them where they need to take the rates to make a profit.
Government Requirements Affect Rates
While the flow of the economy affects refinance rates, the government plays a hand in this as well. The Federal Reserve is actually a major player in the economic conditions, including those affecting housing purchases. The Federal Reserve controls how much money is pouring into or out of the economy, which then controls inflation and refinance rates. If major inflation begins to occur the dollar drops in value, so they try to keep things fairly steady. Unfortunately, it’s not a foolproof system and doesn’t stop inflation nor does it prevent economic slumps. In addition to the Federal Reserve, we have a government banking system that sets the tone daily for the interest rates. To understand this, you have to realize that banks loan money to consumers and each other. When they loan money to each other, they are required to pay interest on that money, as any consumer would. This rate that the banks pay is established by the government and is determined daily to ensure that the banks have the reserves on hand that the state requires them to have. This rate isn’t determined randomly. There is a Federal Reserve Board that decides what this rate will be. From there, banks and lenders determine what interest rate to give to their consumers.
Understanding the full extent and impact of the economy would take a commitment of time and some studying, so the information given above is a very condensed, simplified version of the goings on in the market. Rates are not only affected by the government or the major banks. They follow the natural movement of the economy, and the financial institutions do their best to reflect that. As a consumer, to determine whether you are getting a great rate, all you need to do is compare the average rate of the day and the rates within the last few years. Doing a little research will give you a pretty good idea of where you stand.