Interest rates fluctuate; but why?
Interest rates are a crucial component of the economy as they determine the cost of borrowing money. Fluctuations in interest rates can have a significant impact on the economy, affecting consumer spending, investment, inflation, and more. In this article, we will explore why interest rates fluctuate and what factors contribute to these changes.
Economic growth and inflation:
The health of the economy is a major factor in determining interest rates. If the economy is growing, the demand for money increases, leading to higher interest rates. On the other hand, if inflation is high, the central bank may raise interest rates to curb inflationary pressures.
The central bank (such as the Federal Reserve in the US) is responsible for setting interest rates through monetary policy. The central bank will raise or lower interest rates to meet its goals, such as maintaining low inflation, encouraging economic growth, and ensuring stability in the financial system.
Market forces: The supply and demand for money also influence interest rates. If there is a high demand for borrowing, interest rates will increase, and if there is a low demand for borrowing, interest rates will decrease. This dynamic is similar to the way supply and demand for goods and services determine their prices in the market.
Political and geopolitical factors:
Political and geopolitical events can also impact interest rates. For example, if there is political instability, investors may withdraw their investments, leading to higher interest rates. Similarly, a natural disaster or a geopolitical crisis can also affect interest rates.
Borrowing money isn’t free
interest is essentially the cost of borrowing money.
Lenders put a price on the rate of which you owe, and it usually depends on the supply and demand in the economy. If demand is low, lenders generally charge less for interest and when demand is high, they can charge the interest rate at a higher percentage.
During a recession, lenders typically put their loans “on sale” by dropping the rate since fewer people are looking for loans.
Whether you can afford to pay back a home loan and its interest should be a factor when looking to buy a house. Interest rate fluctuation is a topic you need to discuss with your loan officer. In good and bad times in the economy, the interest rate on your loan can affect your ability to continually make payments on your home.
When buying a home you need to compare loan options and the interest rates associated with each loan.
When you apply for a loan, your loan officer will give you a good faith estimate which will include your annual percentage rate (APR). According to the CFPB, the APR “is the cost you pay each year to borrow money, including fees, expressed as a percentage. The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan. The higher the APR, the more you’ll pay over the life of the loan.”
If you are ready to begin your journey to homeownership and don’t know where to begin, talk to an expert in your area today.