What Makes Interest Rates Rise?

To put it simply, interest rates are the cost of borrowing money. Interest provides lenders compensation for taking the risk of loaning money. Based on several factors, interest rates ebb and flow, causing varying interest rates at any given time. Last year, interest rates hit a historic low. Right now, interest rates are quickly rising with no signs of stopping anytime soon. Though this shift may seem dramatic for just a year, the current rates still lie below the 50-year average.

Supply and Demand of Credit

As demand for money and credit rise, so will interest rates. In turn, as demand decreases, so will rates. On the other hand, an increase in the supply of credit will reduce interest rates, while a decrease in the supply of credit will increase them. The supply of credit is directly related to the amount of money banks have from account holders, as banks use that money towards business and investment opportunities.

Inflation

The economy also significantly influences interest rates, with rising inflation rates signaling higher interest rates. Lenders demand an increase in rates to offset the lowered purchasing power of future payments and increased risk.

Federal Reserve Rate

With regular announcements, the U.S. Federal Reserve explains how monetary policies affect interest rates. Federal funds are the rates institutions charge for short-term loans to other institutions. This rate ultimately determines what banks will charge for the money they lend. So, if institutions are charging higher rates, the bank will also need to charge higher rates.

As you see a shift in any of these areas, expect interest rates to follow accordingly. On top of these three rate influencers, other personal factors such as credit, type of loan, and length of the loan can affect interest rates. Want to see what you’re qualified for and lock in your rate? Coastal Custom Mortgage provides competitive rates and customized mortgage programs to help homebuyers reach their unique financial goals. Get in touch today to get started!