Why Do Mortgage Rates Fluctuate?

Have you ever wondered why mortgage rates change from time to time? You check one day and get one rate and check the next and get a slightly different rate. Mortgage companies and borrowers are subject to potential daily and even hourly shifts in the market. Mortgage rates fluctuate on the simple principal of supply and demand. So why does this happen?

Interest Rates

Interest rates have a dramatic impact on mortgage rates. The higher the interest rate on a home loan, the higher the monthly payments will be. This is why it’s important for home buyers to be certain that their mortgage broker is working with them to receive the lowest interest rate possible on their loan.
In addition, adjustable interest rates can have a devastating effect on one’s mortgage payments. While the interest rate and monthly payments may initially be low, once the interest rate begins to increase, the monthly payments will as well. This can leave homeowners overwhelmed and unable to make their monthly mortgage payments.

Inflation

A major factor that influences mortgage interest rates is inflation. A higher inflation rates is often related to a growing economy. When the economy grows, the Federal Reserve increases the interest rates to slow down the economy and reduce inflation. Inflation is seen during an upward price change of goods and services. In a strong economy, there is higher demand for them, so producers of the goods and services people want, can raise prices. A stronger economy therefore results in increased mortgage rates.

Changes in Treasury Bonds

In order for the nation to pay its debt, the U.S. federal government will sell notes called treasury bonds. They will sell these in an auction style, thus the going rates of treasury bonds largely depend on supply and demand. Treasury bonds are a popular investment choice since the U.S. Government guarantees it. On the downside, the returns of this type of investment are also very low.

Treasury bonds directly affect mortgage rates since investors usually invest their money in a fixed rate treasury bond, and lend you money on a slightly higher rate. The investor’s profit comes from the difference between treasury bond rates and the interest rate they’re giving to you. If the treasury bond rates are higher, they offer you a higher mortgage rate and vice versa.

Economic Conditions

Even in the worst of times, the federal government is still highly unlikely to even consider defaulting on its loans. However, when the economy is in a depression, individuals are at a much greater risk to lose a job and not be able to repay their mortgage. As a result, the mortgage rates will rise much more than the price of other securities because the risk involved in a mortgage has increased.

In addition, interest rates are what controls money flow in the economy. Higher interest rates may curb inflation, but they also slow the economy. Lower interest rates tend to stimulate the economy, but could eventually lead to inflation. There is a delicate balance between decreasing interest rates to stimulate the economy and increasing them to prevent inflation.

There are a number of factors that go into mortgage rates. Each of them plays their own part in the raising or lowering of the rates. Watching, as an informed consumer, and acting at a time when the rates are lowest, is the best way to make a good, informed decision.