How Do Mortgage Rates Affect Home Buying?

Historically, mortgage loans have been either fixed-rate or adjustable. In recent years, however, a new hybrid mortgage that combines the best of both worlds—as well as a few offspring in between—has come onto the market. In other words, these days, you can pretty much get a custom-built mortgage created just for you. That being said, there are some things you can’t change, like inflation and how it affects mortgage rates.

Banks and other mortgage lenders are in the business of making money. They do this by charging interest on loans. This means they want to give you a mortgage, but also want to make sure they will get paid back and earn money on top, too. So, they want to offer an affordable interest rate to attract more home buyers and still make a nice profit for themselves.

What Determines Interest Rates?

The rate of interest charged is a percent of the mortgage and on top of the total amount of the loan. Monthly payments include interest and principal. The interest is what keeps banks in business. It is like a fee they charge for lending you the money. Interest is determined by many factors dictated by the economy. The national central bank, the Federal Reserve, sets the base interest rate for the country, and individual banks use this rate as a starting point when determining the annual percentage rates (APRs) they will offer customers. Banks may also increase or lower this rate based on your credit score. The better your credit, the better rate you may be able to get.

When the Federal Reserve determines a high rate of interest, the cost of borrowing increases. When this cost is high, people are not as anxious to incur debt, especially not a huge debt like a mortgage. This affects the whole economy because demand lowers, which in turn decreases the need for new home construction. Interest rates also tend to increase with inflation.

Basic Payment Calculations

The easiest way to determine what your monthly mortgage payment will be is to use an online mortgage calculator. There is much more involved with buying a house than just its listing price. There is interest on the money you borrow, property taxes and insurance. In most cases, these costs will be included in your monthly payment. This saves you a lot of headaches and ensures you never get behind on these costs.

Most of these extra costs are not included in an online mortgage calculation, but the calculator will give you a very good idea of what your monthly payments will be.

Effects on Affordability

These and many other factors have a profound effect on the affordability of your new home. You need a down payment, which is generally 20 percent of the price you have agreed to pay for the house. You may qualify for discounts or incentives to lower the amount of down payment.

Then you have taxes and insurance. However, the biggest cost is regular maintenance and upkeep. These are usually small costs you encounter every day, but if you sit down and add them all up, it comes to quite a hefty sum. If you consider major repairs, like a new roof or driveway, then the cost of homeownership rises exponentially.

Effects on the Market as a Whole

When interest rates are high, businesses and consumers tend to cut back on borrowing, which in turn means cutting down on spending. This causes the earnings of lenders, banks and credit card companies to drop significantly which causes stock prices to drop as well. On the opposite end of the spectrum, low interest rates inspire more spending, especially on big-ticket items than require a loan, which leads to more borrowing. This means stock prices will also be on the rise.

Bond prices are also affected by interest rates, but in the opposite way. When interest is high, bond prices fall while bond rates rise. This is because the price of a bond is dictated by the rate of interest it pays out.


Although it is not the final deciding factor, interest rates can have a profound effect on when you will buy a home. Very few people decide to buy when interest is at its highest, but sometimes, you may not have a choice. How long can you wait for rates to drop? You may also be wondering if they ever drop again during your lifetime? The answer is probably. There are few things as unpredictable as interest rates. Buying a home requires preparation and educating yourself on all the factors involved will help you ultimately receive the best results. 

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