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The Link Between The Stock Market And Mortgage Rates

The Link between the Stock Market and Mortgage Rates

What Is the Stock Market?

The stock market is a financial institution where trading of shares of companies takes place. Public limited companies (PLCs) quote their shares on the stock exchange. Moreover, PLCs are the only type of business organization that can trade its shares on the stock market. The demand and supply forces also determine the price of a company’s share, and the share sells at that particular price. However, the share price can rise or fall, subject to several factors, like company performance and shareholder preferences. Also, a stock market can crash if there is a significant drop in prices, which can be possible due to an economic crisis or disaster. 

What Are Mortgages?

On the other hand, Mortgages are long-term loans that enable an individual to purchase a property, house, or land. The property that an individual purchases act as collateral for the lender. If, in any case, the borrower is unable to pay the mortgage, the lender can sell the property and get his money back. 

Types of Mortgages

There are two most common types of mortgages – fixed-rate and an adjustable-rate mortgage. Fixed-rate mortgages allow borrowers to borrow loans at a constant interest rate for a period of 10, 15, or 30 years. Also, the interest payments are high if the mortgage is for a shorter term. The prime advantage of this type of loan is that there is a certainty that the borrowers have to pay the same amount for the loan’s entire duration. Also, any fluctuations in the rate don’t cause any changes in the monthly payment. 

In contrast, adjustable-rate mortgage (ARMs) doesn’t have a constant interest rate, and it tends to change over the life of the mortgage. One of the primary risks of this type of mortgage is that the interest rate may rise significantly, making the borrower default. 

Relation of the Stock Market and Mortgages Rate

There is no direct relation between the stock market and the mortgages rate. Several factors can affect mortgages rates like inflation, economic growth, housing, federal reserve, and the bond market. There are mortgage stock markets like Fannie Mae and Freddie Mac that play a major role in determining the mortgage rates. Moreover, these markets issue mortgage-backed bonds (MBS), which trade like the stock market. The interest payments by mortgage-holders support these mortgage stock markets. Now, there is an inverse relationship between the mortgage rates and the price of MBS. Therefore, the stock market can only indirectly affect the mortgage rate by impacting bond prices. Moreover, the demand of investors also affects mortgage rates.

For example, when the stock market goes down, it can be because investors are shifting capital in the bond market. Hence, the price of MBS will increase, and the mortgage rate will drive down. Likewise, the reverse will happen if the stock market goes up. This analysis concludes that the stock market’s performance may shift investors to the bond market, which can cause changes in mortgage rates. Similarly, other factors that account for changes in mortgages rate.

Federal Reserve Impact on Mortgages Rate

The Federal reserve alters the interest rate to keep the inflation rate stable. The fed fund rate is the interest rate that banks charge when they are lending to one other. The feds can increase the interest rate to lower the high inflation in the economy, causing overheating. Moreover, banks’ high lending cost affects borrowers’ interest rates for resources like credit card bills and mortgages. As a result, consumption, as well as mortgage rates, will reduce in the economy. In this way, feds can alter mortgage rates to keep inflation stable. According to a survey, the current mortgage rate is around 2.6% for 20 and 30 years, while it is around 2.12% for 15 years. 

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