When you take out a mortgage, your lender determines the rate of interest you’ll be charged for a portion of, or for the duration of your loan. This rate is heavily influenced by the overall economy’s interest rates.
What is interest rate risk?
When a bank loans you money, it must pay an interest rate back to the Federal Reserve Bank, the central banking system of the United States. Think of it like this: if the bank is your lender, then the Fed is the bank’s lender. Since these interest rates move all the time, the bank is constantly exposed to price risks that will shape how much money it loans out, and at what rate.
How does it impact my mortgage?
Mortgage rates rise and fall along with interest rates. When banks use interest rate futures to manage their interest rate exposure, they are better able to give you a lower mortgage rate because they’ve already locked in their own short- or long-term interest rate. By the same token, this certainty allows them to loan more money to more people and businesses.