When you’re in the market for a new home, there’s a lot to consider. Location, square footage, number of bedrooms and bathrooms – it’s a big decision. But one of the most important factors in deciding whether or not to buy a home is the interest rate.

Interest rates play a large role in how much your monthly mortgage payment will be and ultimately how much you’ll pay for your home over the life of the loan. So it’s important to understand how interest rates are determined and what factors can affect them. Keep reading to learn more about how interest rates can affect your home-buying journey.

How Interest Rates Are Determined

Interest rates are set by three main groups: The Federal Reserve, commercial banks and savings and loans institutions. The Federal Reserve, or “The Fed,” as it’s commonly called, is responsible for setting monetary policy in the United States. This includes setting the target federal funds rate, which is the rate that banks lend money to each other overnight. The target federal funds rate influences other short-term interest rates like the prime rate – the rate at which commercial banks lend money to their best customers – which in turn affects long-term interest rates like the 30-year fixed-rate mortgage.

What Factors Affect Interest Rates?

In addition to the actions of The Fed, there are a number of other factors that can influence interest rates, including:

• Inflation: When inflation is high, interest rates usually are too because lenders need to be compensated for the loss in purchasing power of their money.
• Employment: A low unemployment rate indicates a strong economy, which usually results in higher interest rates because investors feel confident about lending money when there’s little risk that borrowers won’t be able to repay their loans.
• Economic growth: Strong economic growth also signals a healthy economy and usually leads to higher interest rates.
  All of these factors – and others – come into play when lenders set mortgage interest rates. And because these factors are constantly changing, so too do mortgage interest rates. That’s why it’s important to stay up-to-date on economic news and trends if you’re thinking about buying a home.

Conclusion

If you’re thinking about buying a home, it’s important to keep an eye on interest rates. They can have a big impact on your monthly mortgage payment as well as the total amount you’ll pay for your home over the life of your loan. Interest rates are determined by The Fed and commercial banks, and they can be influenced by things like inflation and employment levels. By understanding how interest rates work, you can be better prepared when shopping for a new home.