Latest Interest Rate Predictions – How You Are Affected By The News
Interest rate predictions are a sign that the banking system is struggling. The Fed keeps lowering Federal interest rates, but mortgage interest rate predictions are still going up – how can this happen?And what will it mean for American home owners?
The idea that home owners need to understand when it comes to interest rate predictions is how the interest rates set by the Fed and mortgage interest rates charged by mortgage lenders are connected.
The interest rates which are set by the Federal Reserve determine the cost of borrowings for mortgage lenders. 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 decide not to pass on their savings to home owners.
The reason is not profiteering – there is enough competition in the mortgage lending market to ensure that no one lender can profit unfairly. The motivation is that being a mortgage lender in today’s market is a whole lot more risky that it used to be, and perceived risk raises interest rates.
Lenders are charging everyone more interest to cover their losses on the few who will default on 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 apparent interest rate (called the “nominal” rate) includes the rate of inflation. To figure out the “real” interest rate, you need to subtract the rate of inflation from the nominal interest rate.
Today, when you do that, you get a negative number! In other words, nominal interest rates are not keeping pace with inflation.
Clearly, this is a situation that cannot continue for long. Sooner or later, probably sooner, the Fed will have to raise interest rates to at least break-even levels, matching the rate of inflation. This coming interest rate rise will obviously flow through into mortgage interest rates.
This means that it’s really only short time, a very short time, before mortgage interest rates rise again.