How Market Conditions Affect Adjustable Rate Mortgages

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Market Trends

There are several mortgage options available to homebuyers today, however, one of the more appealing is the adjustable rate mortgage (or ARM). This type of mortgage often winds up costing less for the buyer, especially when they are only planning to stay in the home for a few years. Before you decide on this or any mortgage, it is essential that you understand what can affect the rate--what makes an adjustable rate “adjust” so to speak. We’ve gathered a few examples of how market conditions can change the interest rate you will pay on your ARM.

  • Inflation - While inflation doesn't directly affect an adjustable rate mortgage, it does have an indirect effect on the rate. Mortgage lenders need to maintain interest rates that will overcome the impact of inflation on their bottom line. Because the interest rate represents profit for their company, it must overcome the effects of inflation. Therefore, the inflation rate, whether it is lower or higher, will have an impact on whether the interest rate rises or falls.
  • Overall Economic Health - When the economy is stronger, more people are searching for home loans, and it may cause the lenders to raise their rates since they have a finite amount of capital to lend out. The opposite occurs during a weakening economy. Since there is less demand for homes, mortgage lenders have more capital available to lend so interest rates may drop.
  • The Housing Market - When fewer homes are being built or offered on the resale market, there is a decline in people who are purchasing homes, this makes the interest rates trend downward. On the other hand, when there are many homes available and consumer demand matches this, the interest rates rise a bit since lenders are tapping their resources.
  • The Bond Market - Mortgage-backed securities are investment products. When these bonds pay more, it is a sign that interest rates are on the upswing. However, when they are less profitable for investors, the interest rates that someone with an adjustable mortgage may pay will trend towards a lowered rate.
  • The Federal Reserve - Policy that is set by the Federal Reserve Bank is one of the absolute most important factors that influence the interest rate on an adjustable rate mortgage. The Federal Reserve doesn't set the specific interest rate, but the actions that they take in establishing the federal fund rate and adjusting the available money supply of the country has a considerable impact on the interest rates that will be found with adjustable rate mortgages.

While all of these elements may seem a bit complex, your mortgage lender can help you understand how all of this comes together to affect your adjustable rate mortgage. If you have any questions or concerns about a current loan or one that you are considering, reach out to us at Liberty Financial in Birmingham, Alabama today. We look forward to helping you find the ideal mortgage product to meet your needs.