On Thursday, Freddie Mac reported that the average rate on 30-year, fixed-rate mortgage rose to 3.94 percent from 3.88 percent last week, compared to the same time last year when the benchmark rate was 3.47 percent.
This means that the 30-year fixed-rate increased to its highest point in the past three months, according to Freddie Mac’s latest Primary Mortgage Market Survey.
Meanwhile, according to data from the Mortgage Bankers Association, they say mortgage applications declined. All in all, today’s mortgage rates are still very favorable for home buyers.
*Information taken from TheMortgageReports.com
What causes rates to rise and fall?
One of the major factors in determining interest rates is inflation. Inflation causes fixed-income investments like bonds to lose value, and that causes their yields ( interest rates) to increase.
When rates fall
The buyer gets the same $50 a year in interest that you were getting. However, because he paid more for the bond, his interest rate is not five percent.
Your interest rate: $50 annual interest / $1,000 = 5.0%
The buyer gets an interest rate, or yield, of only 4.2 percent. And that’s why, when demand for bonds increases and bond prices go up, interest rates go down.
When rates rise
However, when the economy heats up, the potential for inflation makes bonds less appealing. With fewer people wanting to buy bonds, their prices decrease, and then interest rates go up.
Imagine that you have your $1,000 bond, but you can’t sell it for $1,000, because unemployment has dropped and stock prices are soaring. You end up getting $700. The buyer gets the same $50 a year in interest, but the yield looks like this:
$50 annual interest / $700 = 7.1%
The buyer’s interest rate is now slightly more than seven percent. Interest rates and yields are not mysterious. You calculate them with simple math.
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