Your lender is trying to get you to apply for a mortgage refinancing so that you can switch to a fixed interest mortgage rate. Your lender says that you have to do this if you want to be free from the unpredictable changes in market rates. But what does the economy have to do with your mortgage?
How interest rates are set
Like everything else in the market, your mortgage interest rate is set by how supply and demand work together. When a lot of people borrow money and the economy is doing well, interest rates go up. When people don't borrow as much and the economy is weak, interest rates go down.
But market forces aren't the only ones setting the stage. The Federal Reserve is also a big player. Fed funds are important no matter what the Fed does or where they put them.
The Fed Funds Rate
What is a federal funds rate, though? This is the interest rate that banks charge each other when they lend money. It is also called the fed funds rate. The maturity of the rate is less than two years, which makes it a short-term type. Short-term mortgage rates are affected by how the federal funds rate changes.
Simple economic laws say that when short-term interest rates go down, people are more likely to borrow money and spend it. The Fed tries to stop this from happening because it leads to inflation.
Long-term interest rates are those that don't change for ten years or more. Indirectly, short-term rates have an effect on them. Most of the time, they go up when people try to stop inflation. When inflation is getting too high, the Fed tries to fix the problem by raising the interest rates on short-term mortgages. People whose finances are greatly affected by changes in interest rates on the market have to think of other options.
Pay attention to what your lender says and get that refinancing mortgage.
Your lender may be right after all. Maybe you do need that mortgage refinancing. You don't know what anyone is talking about when they talk about mortgage rates, and the last thing you need is to have to keep an eye on them just to keep up with your mortgage payments after refinancing. Your mortgage rate might not be right for you right now because it changes.
What's the difference between a mortgage rate that changes over time and one that stays the same?
By the way, do you know what an interest rate that changes is? How is it different from a mortgage rate with a fixed interest rate? An interest rate that changes with the market is called a "adjustable rate." This means that if the economy changes, you may suddenly have to deal with a high interest rate that you didn't expect.
On the other hand, a fixed interest rate doesn't change no matter what the market does. No matter what changes happen in the economy, it stays the same. It's more stable and easy to plan for.
Listen to what your lender tells you. Get that mortgage refinancing while the deal is still on.
