Your Lake of the Ozarks Mortgage Lender: How Interest Rates are Determined on a Macroeconomic Level

When you purchase a home and take out a mortgage at the Lake of the Ozarks, you will be paying back that loan with interest. An interest rate is the cost of borrowing money, and it varies from situation to situation. While the specific interest rate you will be offered takes many factors of your personal life into consideration, outside influences affect what interest rates are available at a certain point in time. Prevailing interest rates are always changing, but why? Today’s blog takes a look at the bigger picture of how interest rates are determined on a macroeconomic level.

The Federal Reserve

The Federal Reserve is the Fed’s monetary policymaking body. While it is an instrument of the U.S. government, it is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government. It is charged with maintaining the stability of the nation’s financial system, by taking action to raise or lower short-term interest rates in an effort to keep things stable. The Federal Reserve sets the “Federal Funds Rate”, which is the rate that institutions charge each other for extremely short-term loans. This rate slowly trickles down into other short-term lending rates, such as mortgages. When the Fed Funds Rate increases, eventually, so do mortgage rates.

The Condition of the Economy

How well the economy is doing is a factor that the Federal Reserve looks at when determining whether to raise or lower the Federal Funds Rate. When the economy is doing well or growing, companies are profitable, unemployment is low and consumers are spending money, the Fed acts to raise short-term rates in an effort to slow the economy from growing too quickly and increasing inflation. Inversely, when the economy is contracting or slowing too much, the Fed acts to lower the Federal Funds Rate in an effort to speed up the economy by making it easier for consumers and businesses to borrow money. This keep people employed and keeps the economy from sinking into a recession.

Supply and Demand

Another economic factor that comes into play is the supply and demand of credit. The supply of credit is increased by an increase in the amount of money that’s made available to borrowers. For example, when a consumer opens a bank account, depending on the type of account, that bank can use that money to lend out to other customers. An increase in supply of credit can reduce interest rates, while a decrease can raise them. Conversely, an increase in the demand for credit can raise interest rates, while a decrease in demand can lower them.

As a borrower, it’s important for you to understand these changes. Your Lake of the Ozarks mortgage lender doesn’t personally determine the rates available to you. Your rate is determined by an array of factors, economic and personal. To learn more about what interest rates are available to you at this time, talk to a mortgage professional. Give Lakelender Michael Lasson a call at 573-746-7211 today!

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