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When we go to the bank or other financial institutions to a get mortgage loan, we obviously want to get the best rate out there. But this loan interest rate largely depends on the time of year and indeed the year it self. Interest rates fluctuate, sometimes within a year, sometimes throughout several years.

Well interestingly the economy plays a big part in the interest rates that we pay. Generally people think of economy as something that the government controls. After all, they’re always announcing increase or decrease in interest rates on the news. However, the government doesn’t reach these decisions by licking their finger and holding it up in the wind to see which way the wind is blowing. There are several factors influencing their decision on how to adjust the interest rates.

The Federal Reserve is one of these factors. They hold on to all of the government’s money and more. Hence the discount rate offered by the Federal Reserve trickles down to us, your average borrower.

Sometimes government policies can affect the price of goods and services. This in turn affects the Federal Reserve’s discount rate. Banks borrow money from the Federal Reserve, hence if their discount rate is higher, then the bank’s mortgage rates are also higher.

The Federal Open Market Committee meets regularly to discuss the discount rate. They decide whether to lower or raise it, and this can affect the shorter term loans like home equity loans and adjustable rate loans.

When the economy is good, the property market is up. More people are borrowing money. The interest rate is raised to level out demand, and this increase is reflected in people’s home loan. When the market is at a low, property market is down, less people will borrow money. The interest rate is lowered to increase demand, this will lower the borrowing rate in general.

No one can accurately predict what will be decided in these committee meetings. The thing to remember is that regardless of the current interest rate, lower isn’t always better. For example, bad economy means low interest rates, but this could also mean that it’ll be harder for you to qualify for the loan. Good economy means higher interest rates, but the competition between banks will mean that you will get a good deal if you shop around.

There is more to interest rates than just a number. Look out for the economy in general, and pay attention to those interest rate announcements.