What Makes Mortgage Interest Rates Go Up or Down?
Mortgage interest rates are anything but stable: one day they fall, the next they rise. The only thing that's certain is that they rarely remain the same for long periods of time. When you're looking for a mortgage loan, you'll probably be keeping a close eye on these rates; if they're low when you close your loan, you'll pay less each month to your mortgage lender. If they're higher, you'll pay more. But just what is it that causes mortgage interest rates to fluctuate so often? There are many factors involved.
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Tied To Other Interest Rates
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Mortgage interest rates rise and fall along with other interest rates, including the interest rates on personal loans, car loans and bonds. All of these rates fluctuate according to the performance of the national economy and how the Federal Reserve reacts to these changes.
Inflation
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Inflation may be the most important single predictor of whether interest rates rise or fall. If the economy is growing too quickly, and giving hints of rapid inflation, the Federal Reserve will often raise short-term interest rates in an effort to slow down borrowing and the economy. When this happens, mortgage interest rates follow suit and also rise.
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Shrinking Economy
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When the national economy struggles and begins to shrink, the Federal Reserve may again take action by altering short-term interest rates. When the economy is sluggish, though, the Fed will often cut short-term interest rates. It's good news for home buyers when this happens: mortgage interest rates will fall when the Federal Reserve takes such action.
Volume
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When an unusually large number of mortgage loans are originated, mortgage interest rates can quickly shoot up. The reason is simple: When there are too many loans on the market, it's hard to attract investors to purchase these loans, and selling mortgage loans is how originators often make their profits. To slow the number of available mortgage loans, then, interest rates will rise.
10-Year Treasury Bond
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One of the easiest ways to determine how mortgage interest rates will rise and fall is to track the performance of the 10-year treasury bond. Historically, mortgage interest rates have most closely moved in lockstep with this bond. Typically, when the rate on the 10-year treasure bond goes up, so will the rates on mortgage loans.
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References
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