Our last blog post addressed why interest rates move and how supply, demand and the overall health of the economy impacts rates. In this post, we’ll go into the components of an interest rate and what factors play a part in that “magic number”.

Interest rates have four major components, which also impact whether rates rise or fall:

• Inflation (the upward movement in the average overall level of prices) and its opposite, deflation, play a role as they are indicators of where the economy is headed. When either inflation or deflation gets too extreme, the Federal Reserve will often times adjust rates in an attempt to balance the economy, which will have an impact on mortgage rates.
• The real interest rate is the actual interest rate minus the rate of inflation.
• Liquidity risk is the money the lender receives for investing in something that is difficult to sell. Many mortgage loans are sold on the secondary market as investments, and when that market dries up, the liquidity risk increases.
• Credit risk is assumed when a loan may not be repaid on time or at all. One of the indicators in this area may be your credit score, with lower scores warranting higher credit risk because of the chance of non-payment.

Why is it important to understand these components? Because understanding the forces of economic conditions can help provide you with somewhat of a prediction about interest rates and where they may go in the near future. Ask about our interest rates on home loans today!

Contact AmeriFirst at 800-466-LOAN or feel free to contact us online and request additional information.