New Mortgage Interest Rate Prediction - How You Are Threatened By The Situation
Interest rate predictions are a sign that the banking system is struggling. The Federal Reserve is lowering prime interest rates, yet mortgage interest rate predictions are still shooting up - what’s going on?And what will it mean for American home owners?
The key concept home owners need to comprehend about interest rate predictions is the connection between the interest rates set by the Fed and the interest rates charged by mortgage lenders.
Interest rates decided by the Federal Reserve influence the cost of funds to financial institutions. Financial institutions don’t own all the money they lend out as mortgages - they actually borrow 90% of what they lend out to home owners on the wholesale market.
When the government lowers interest rates, it lowers the base costs for mortgage lenders, and in that case you would think that mortgage interest rate predictions would fall. However, mortgage lenders may choose not to pass on the reductions to mortgage holders.
The reason is not piratical tendencies - there is sufficient competition in the mortgage market to ensure that no financial institution can profit unfairly. The real reason is that being a mortgage lender is now a whole lot more risky, and perceived risk raises interest rates.
Mortgage lenders are charging everyone more interest to offset their losses on the few who will fail to pay their mortgages.Until the current housing market settles, risks for lenders will remain elevated, and interest rate predictions will continute to be high.
The Fed can’t lower interest rates indefinitely. The actual interest rate (called the “nominal” rate) includes an allowance for inflation. To find the “real” interest rate, you need to subtract the inflation rate from the nominal interest rate.
These days, when you do that subtraction, you will see a negative number! This means that nominal interest rates are less than the rate of inflation.
We all realise that this is a situation that surely cannot continue for any length of time. At some point, the Federal Reserve will have to raise interest rates to at least break-even levels, matching the rate of inflation. This imminent interest rate rise will flow directly through to mortgage interest rates.
In other words, it’s only a matter of a short time before mortgage rates rise again.
