Economics of Mortgages
                     ECONOMICS OF MORTGAGES
A mortgage is a loan that makes it possible to buy real estate, whether it's 
your home or an investment property. The lender provides the money 
necessary to make the purchase, and the borrower pays that money back—
plus interest—in installments, usually over 15 to 30 years.
INTRODUCTION
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The gradual upward movement of prices due to inflation is a reflection of the 
overall economy and a critical factor for mortgage lenders. Inflation erodes the 
purchasing power of dollars over time. 
INFLATION
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Economic growth indicators, such as gross domestic product (GDP) and the 
employment rate, influence mortgage rates. With economic growth comes 
higher wages and greater consumer spending, including consumers seeking 
mortgage loans for home purchases.
THE RATE OF 
ECONOMIC 
GROWTH
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The monetary policy pursued by the Federal Reserve Bank is one of the most 
important factors influencing both the economy generally and interest rates 
specifically, including mortgage rates.
FEDERAL 
RESERVE 
MONETARY POLICY
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Banks and investment firms market mortgage-backed securities (MBSs) as 
investment products. The yields available from these debt securities must be 
sufficiently high to attract buyers.
THE BOND 
MARKET
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Trends and conditions in the housing market also affect mortgage rates. When 
fewer homes are being built or offered for resale, the decline in home 
purchasing leads to a decline in the demand for mortgages and pushes 
interest rates downward.
HOUSING MARKET 
CONDITIONS
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The amount you borrow toward a home purchase is referred to as the principal. 
The bank will generally lend you up to 90% of the value of the real estate. You 
must pay the rest through a down payment.
HOW A 
MORTGAGE 
WORKS TODAY
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Fixed-Rate Mortgages
The most popular type of mortgage is the conventional 30-year fixed interest 
rate loan. It's represented between 70% and 90% of all mortgages since 1999.
Adjustable-Rate Mortgages
Adjustable-rate mortgages offer lower interest rates and monthly payments 
than fixed-rate loans.
COMMON 
MORTGAGES
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