Inflation. Most lending agreements are repayable over lengthy periods, usually 15 or 30 years. The cost of living and material goods usually increases over the life of the loan. Lenders have to charge interest rates that ensure they’ll still make a profit when the value of the dollar decreases.
Economic climate. When the economy’s going well — unemployment is down, and the gross national product is up — people buy more property and apply for more home loans. Interest rates then go up: more people want loans, but lenders have less money available. When the economy is doing poorly, the opposite is true. Fewer people are buying homes, and lenders have to make interest rates low to attract potential homebuyers.
Financial markets. When the bond market is healthy and bond prices are higher, interest rates tend to be lower. The inverse is also true: Lower bond prices result in higher interest rates. Real estate interest rates generally follow the patterns of bond interest rates, going up or down accordingly.
Housing market conditions. A robust housing or construction market usually results in higher interest rates — there’s more demand, and buyers are willing to pay more. When new home construction stalls, the real estate market slows down, or more people choose to rent their homes instead of buying, interest rates usually decline with the lack of demand.