Mortgage Interest Rate Predictions

Posted on July 30, 2008
Filed Under Mortgage Smarts |

Even the best mortgage interest rate predictions can be like making weather predictions - it is impossible to be precisely accurate with the mortgage rate forecast, and the further in advance you try to predict mortgage interest rates, the greater the margin of error in the prediction.

On the other hand, even mathematically chaotic systems are predictable in broad terms.

If you predict the weather, you may not be able to predict the top temperature for a given day in July, but you can reasonably sure it will be within a certain range - say, if you live in Miami, between 80 and 95 degrees F, and if you live in Stockholm, between 16 and 25 degrees C.

Just as climate gives a broad indicator of summer top temperatures, economic climate gives a broad indicator of mortgage interest rates. Just as we can make moderately reliable weather predictions, we can make moderately reliable mortgage rates predictions.

Factors Which Make Mortgage Rates Predictions Rise: Inflation

So called “real interest rates”, the interest rates which move in response to supply and demand in the financial markets, are independent of inflation. They are calculated assuming that inflation is zero.

To get from the “real interest rate” to the “nominal interest rate”, which is what your bank will charge you for your mortgage, you simply add on the annualised percentage rate of inflation.

This means that if nothing changes whatsoever in the housing market, but something changes elsewhere to create inflation (like, for example, oil prices increase, raising the prices of gas at the pump, heating oil, and anything transported by road), then there will be upward pressure on interest rates, and mortgage rates predictions would have to take that upward pressure into account.

Factors Which Make Mortgage Rates Predictions Rise: Reduced Availability Of Credit

Financial markets operate on supply and demand. If there is a limited supply of anything, then it will go to those who are willing or able to pay more for it. The same is true of mortgage money.

Mortgage lenders generally borrow the money they lend for mortgages, or at least 90% of it. Because of their size and financial stability, they can get a lower interest rate than an individual home owner, and the difference between what they pay for the money they borrow, and the nominal interest rate they charge you, is the bank’s profit on your mortgage. Mortgage rates predictions will take into account whether the supply of money is increasing or decreasing, and likewise, the trends in demand for money.

Mortgage rates predictions are more complicated than weather predictions, because political factors influence mortgage rates predictions. This doesn’t make accurate mortgage rates predictions impossible, of course, but it requires more than just a mathematical model to make accurate mortgage rates predictions - it takes a good poitical “nose” as well! When the time comes, you can find good mortgage interest rate forecast at the Emergency Refinancing web site.

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