Ditech : Investment Decisions and Mortgage Rates as Long-term Rates of Interest

Small businesses often use loans to finance their investment operations. Small retailers finance inventory with loans. Many construction investment companies build condominiums or even single-family homes speculatively, without specific customers lined up. They rely on mortgage rate to pay for labor and materials before the first sales are made. Increases in mortgage rates, therefore, have a direct effect on these business investment decisions.

When a family or individual buys a house, the purchase is typically financed with a mortgage rate. The mortgage rate is a long-term rate of interest. When long-term mortgage rates rise, this increases the cost of financing a new home and has a negative effect on the demand for housing. The effect of increases in mortgage rates investment on housing demand is even exacerbated by the institutional rules of thumb that mortgage lenders use.

A family has to qualify for mortgage rate by showing that it has income of at least some fixed multiple of the size of the mortgage investment payment- the family income must be three or four times the mortgage payment. If the interest rate rises from 8 to 9 percent, this raises the annual interest cost of $100,000 mortgage rates by about $1,000 and this in turn raises the investment threshold for lending by a multiple of that amount, making it harder for families to qualify.