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Why Do Rates Fluctuate?

It's the economy!

The determination of interest rates is as complex as the economy. For example, higher earnings among Fortune 500 corporations could push stock markets higher. The promise of higher returns on stocks might draw investors away from bonds. This in itself could push mortgage rates higher. But lots of other factors can have an effect as well, such as consumer spending, housing starts, retail sales and even presidential elections or terrorist attacks. Even so, we can identify several factors which have a major effect on mortgage interest rates.

What will the Feds do next?

News reports often announce that the Federal Reserve is going to lower or raise rates. This means that the Federal Reserve is changing the Federal Funds Rate, which is the short-term interest rate large banks charge to lend money to each other. These changes are often tied to the absence of a threat of inflation. When short-term rates fall, borrowing and spending increase potentially leading to inflation. When inflation looms, the Feds usually raise interest rates.

What do bonds have to do with mortgage interest rates?

When you get a mortgage loan from a bank, the bank converts that loan into a bond. If the bond market is hot, investors will be willing to pay a premium price for the bond, allowing the bank to drop the rate it offers you. If the bond market is depressed, banks will have to increase the rate on your loan, and on the bond, to attract investors. So the state of the bond market directly affects mortgage interest rates.

What is the Cost Of Funds Index?

The COFI expresses how much interest banks have to pay on the money they borrow and subsequently use for mortgage funding. For example, if people choose to put their money in Certificates of Deposit, which pay higher interest, rather than savings accounts, which pay lower interest, then the bank effectively will have to pay more for the money it loans out. This higher cost will be passed on to borrowers. Do higher housing prices affect mortgage rates? If housing prices are up, buyers must borrow more money to pay for their house. If interest rates are high, potential buyers won't be able to afford loans. So, when housing prices go up, interest rates usually go down.

Does anything else affect interest rates?

Sure, lots of things. A rise in home foreclosures can lead interest rates to rise, as banks charge more interest to make up for the losses they suffered. If the value of the dollar rises, it probably means inflation is falling. And inflation, don't forget, typically takes mortgage rates along with it, that is, higher.

Do rates reflect the general state of the economy?

Virtually everything in our economy is affected by the processes of supply and demand. Mortgage rates are as well. If there is high demand for loans, rates usually rise because lenders feel they can demand higher prices. When demand falls, lenders compete for a shrinking market. When the economy is growing, people have more money in their pockets and so are more likely to be buying houses and applying for loans. So rates usually rise. When the economy is declining, people's finances are more constrained and so there is less house-shopping and less demand for loans. Then rates normally fall. The determination of mortgage interest rates is so complex that it's not predictable. Our loan consultants can give you the most up-to-date information on mortgage interest rates, and help you to find the best possible deal, no matter the market conditions.