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  • 22Jan

    Why are mortgage interest rates in the U.S. so low?

    Long before the beginning of the 2007-2008 financial crisis and recession, interest rates for home mortgages in the United States had fallen to some of the lowest in the country’s history. Why have mortgage interest rates dipped so low? What has caused them to stay low?

    Three Factors Contributing to Low Mortgage Loan Rates

    As of this summary, rates for a 30-year home mortgage loan are available below 2.5%. Creditors consider many factors to determine the mortgage interest rates they are willing to offer. We can identify three primary reasons creditors are keeping mortgage interest rates today at their record-breaking levels. 

    • The U.S. economy has been growing at a slow crawl. The creditor must consider the likelihood of inflation in costs during the time a loan is being repaid. The greater the possibility of inflation, the larger the premium must be that the creditor includes in the interest rate determination. When the economy is growing so slowly, or it is stagnant, there is recession, rather than inflation, and typically less demand from businesses and consumers for loans.  Mortgage rates and other types of long-term loan rates stay low during slow economic growth because the risk of inflation (and the possibility that the cost of goods and services are going to dramatically increase) is diminished.
    • The actions of the federal government and the monetary policies it implements affect interest rates. For instance, the Federal Reserve initiated “Operation Twist” in 2012. The plan included purchasing long-term U.S. Treasury securities with funds obtained by selling or redeeming short-term U.S. Treasury securities. The result of decreasing long-term Treasury securities in the market lowers long-term interest rates.[1] When the economy is slow or stagnant, the government can try to take action to stimulate it. By facilitating lower, conceivably more attractive, long-term rates for home mortgage loans and other types of long-term interest rates, the Federal Reserve was encouraging home buying and other long-term investments to stimulate the economy.
    New house is many people's dream

    New house is many people’s dream

    • The slow economy, political uncertainty, and a general decline in fiscal health globally cause investors to seek assets that are subject to less risk. The financial crisis of 2007-2008 and the five years following have seen a devastating residential mortgage industry bubble and the U.S. federal deficit sharply climbing. Despite these disastrous events, the U.S., when compared to many other countries suffering from economic troubles, is still considered one of the safest places for investors to put their money, and they continue to invest in U.S. government bonds and mortgage-backed securities. This apparent confidence in mortgage-backed securities contributes to the longer-term rates staying low.

    At the point when the economy returns to more rapid growth, demand for loans will increase, the government will cease to effectuate monetary policies to stimulate the economy, and investors and creditors will once again consider inflation as a factor to setting interest rates and investing in U.S. assets. This turn of events will, once again, contribute to higher mortgage loan interest rates.

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