We all know that mortgage rates go up and down on a daily basis, but what causes them to do so? Mortgage rates may still be incredibly low when compared to historical mortgage rates, but will they go up? And, when? And, by how much? Who and/or what decides? There is no one set factor that influences mortgage rates. Rather, it is a variety of factors that could, on any given day, influence mortgage rates.
Some of the Factors That Cause Mortgage Rates to Fluctuate:
Stock and Bond Market
The stock and bond markets directly impact the mortgage industry and thus impact mortgage rates. NerdWallet explains what happens to mortgage rates when there is stock and bond market movement, “Individual mortgage loans are often bundled 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. If inflation threatens, interest rates are boosted to tame the economy and maintain the strength of the dollar. Mortgage securities begin to sell off and prices fall. But because of the “see-saw” inverse relationship between bond yields and bond prices, as prices fall, yields rise. Those rising yields are a direct influence on mortgage interest rates. Inflation causes higher prices for everything, including home loans.”
While this tends to impact things in a less rapid way than the stock and bond markets, the state of the economy directly impacts mortgager rates. If the economy is doing poorly and interest rates are high it means people and businesses will be less likely to apply for loans for things like growth, remodels, etc. But, if the interest rates are low or competitive they will be encouraged to take out loans which means growth and stimulates the economy as a whole. So, if the economy is poor, expect mortgage interest rates to stay the same or drop and if the economy is booming expect to see an increase.
Financial markets keep an eye on certain benchmarks and if there is fluctuation in those benchmarks, mortgage rates may increase or decrease, as SFGate explains, “In addition to regular monitoring by the federal government, the financial markets establish benchmarks to understand where interest rates might be headed. For example, the yield on the 10 year Treasury bond is widely considered to be a benchmark for long-term mortgage interest rates. As a result, lenders often tie mortgage rates to the 10 year Treasury bond to keep the mortgage loan profitable in the long run. Any changes in the 10-year Treasury bond yield influence how mortgage rates are set for current mortgages.”