How Do You Deal With The Interest Rates That Come With A Refinancing Mortgage?
Your lender is trying to convince you that you need to apply for a refinancing mortgage so that you can transfer to a fixed interest mortgage rate. According to your lender, you have to take this action if you wish to be free from the capricious shifts of the market rates. But how is your mortgage affected by the economy?
Determinants of Interest Rates
As with everything in the market, your mortgage interest rates are determined by the interaction of supply and demand. When borrowing is up and the economy is strong, interest rates increase. When borrowing is down and the economy is soft, interest rates decrease.
But it’s not only the market forces that are setting the stage. There is also the Federal Reserve. Whatever the Feds do and wherever they set the fed funds play a crucial role.
The Federal Funds Rate
Now what is a federal funds rate? Also called the fed funds rate, this is the interest rate that is charged whenever banks lend funds to other banks. The rate’s maturity lasts for only two years or less, which makes it the short-term type. The behavior of the federal funds rate affects short-term interest mortgage rates.
As simple economic laws would have it, when short-term rates decrease, borrowing and spending are likely to increase. The result is inflation and the Federal Reserve tries to avoid this.
As for long-term interest …