Why do Mortgage Rates Change?
Why do mortgage rates change? For those who are not deeply involved in the mortgage industry, it may seem like a question that has no clear answer. We’d like to take a few moments to shed some light on why mortgage rates change and help you understand some of the factors that influence them.
The Federal Reserve is constantly making small adjustments to our financial system by raising or lowering the federal funds rate (the interest rate banks charge each other for short-term loans). Long-term loans such as mortgage rates are based on the future value of short-term rates, so changes in the federal funds rate will have an effect on mortgage rates.
If there is a fear of inflation, the Federal Reserve may boost interest rates to maintain the dollar’s strength. As these rates are boosted, mortgage securities will begin to sell off and prices will fall. However, there is an inverse relationship between bond yields and bond prices. As bond prices fall, yields rise. These rising yields are a direct influence on mortgage interest rates.
Mortgage loans are grouped together with thousands of others into mortgage-backed securities. The secondary market for these investments can also move interest rates offered by mortgage lenders. If the cost for consumer goods rises, the dollar loses a bit of its buying power and the resulting inflation impacts spending — and the bond market.
More simply, when there is no fear of inflation, mortgage rates generally stay low and stable. When inflation is immanent, mortgage rates will rise.
The US Economy
Strong economic activity usually fuels home construction, home sales and low interest rates both for business and homeowners. A low interest rate environment with both businesses are potential homeowners are borrowing are signs of a strong economy.
The Global Economy
Global factors impact our economy — including mortgage interest rates. From political unrest to foreign competition, unemployment and food costs, changes in global markets will have an effect on the US economy.
In order to get the best mortgage rate possible, it is important to speak to a highly qualified mortgage banker who will work with you to meet your goals.