What is the connection between mortgage rates and the overall economy?

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Lower mortgage rates are meant to stimulate the economy. The lower rates encourage people to buy existing homes or to build new homes. This in turn helps other economic sectors such as the industries that affect building materials. A strong housing market is a sign of a strong economy.

Mortgage rates are dictated by the prime rate, the rate by which the Federal Reserve (also called the Fed, located in the US) lends banks money. Lower interest rates are not good for savers, but they are a boon to people who are in debt. The Fed lowers the prime rate in order to stimulate the economy by providing incentives for people to buy houses and other more expensive items such as cars. The Fed cannot do this all the time, however, as too much borrowing can lead to inflation and an overall lack of saving. An overheated economy can fall especially hard, as was the case of the recession of 2008 that was sparked by subprime mortgages.

Lower mortgage rates can also be good for people who already own homes. People can take out a Home Equity Line of Credit at the new rate and borrow money to renovate the house or spend on another large item. This in turn stimulates the economy by providing these people a means to secure a low-interest loan while using their home as collateral.

Low mortgage rates are a sign that the government is trying to assist the economy by lowering interest rates in general from the Fed. A strong housing market is a sign of a strong economy; however, if rates stay too low there is little incentive to save money and the economy can become overheated.

Last Updated by eNotes Editorial on

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