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Does the Stock Market Affect Interest Rates?

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Does the Stock Market Affect Interest Rates?

If you own a home, or are in the market for one, the term ‘interest rate’ should be a familiar one. Interest is, in essence, the cost you pay to use someone else’s money. In terms of a mortgage, the interest rate is long-term, up to 30 years.

The stock market and mortgage rates do not directly drive each other. If the Federal Reserve Chairman announces lower or higher rates, he’s referring to the short-term interest rate at which large banks lends funds to one another. That being said, when short-term rates lower, borrowing and spending among consumer usually increases, which can cause inflation. Inflation can cause concern, which can lead to rises in long-term rates, like mortgages.

Are you confused yet?

Basically, there are some patterns that mortgage rates seem to follow in relation to the stock market, but one is not directly affected by the other.

The money used to fund mortgage loans comes from mortgage-backed bonds, a large part of the bond market. Typically, when the bond market is doing well, interest rates fall. When investors sell off bonds in large amounts, mortgage rates rise.

Mortgage interest rates are determined every day in active public markets, which are often ahead of the Federal Reserve. For example, if the markets believe the economy is slowing, interest rates may fall in anticipation of lowered short-term rates by the Federal Reserve.

One thing that’s important to be aware of is that Adjustable Rate Mortgages (ARMs) and Fixed Rate Mortgages are affected differently by a fluctuating market. A fixed rate mortgage is just that, a fixed rate that is set when you take out the loan and doesn’t change for the duration of the loan period. With an ARM the interest rate can go up or down, the rate of which is tied to a measure of interest rates around the country, called an index. When the index goes higher, your payment goes higher. Many ARMs cap how high your interest rate can go, and some limit how low it can go, as well.

Because different types of mortgages are affected differently by changes in the stock market, it’s important to speak to a mortgage professional before deciding on the right loan program for your needs.

Citywide Home Loans make the loan process simple. Visit www.citywidehomeloans.com to see how much home you can afford and find a loan program that’s right for you.

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