How Mortgage Interest Rates Work

Today I had a client ask me a simple question but one that I surprisingly do not hear very often:

How do mortgage interest rates work?

My answer was not quite as simple but I thought I would share it. Basically, interest rates move based on the perceived threat of inflation. In a sense, they are based on how the country's economy is faring. If the economy is doing well there is a greater risk for inflation which pushes long term interest rates higher. Conversely, if the economy is performing poorly then in general the greater risk is for deflation which causes interest rates to move lower in an effort to stimulate the economy.

Inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of time. The more the cost everything rises, the greater the need for higher interest rates to increase the cost of money.

As I said, the answer is not as simple as the question but I hope it creates a sense of understanding of interest rates.

Matt Hanson
Mortgage Planner
Founder
Thriving Artist Alliance