What drives changes in mortgage rates?

It’s the prerogative of mortgage rates to change, either by having mortgage interest rates go up or down. As a borrower deciding when the best time to get approved for a mortgage, or a home-buyer considering an adjustable rate mortgage, these considerations factor heavily into your decision. Before committing to a mortgage interest rate, make sure you know what drives changes in mortgage rates.

Economic Growth

The economy ebbs and swells like the tides, sometimes going to the point of booming and busting. This matters because the higher economic growth there is, the larger number of borrowers there are taking out loans and competing for money. With this comes the simple law of supply and demand - when there are many borrowers competing for mortgages during periods of economic growth, the mortgage interest rates will be higher. If the economy slows down and less borrowing occurs, mortgage interest rates will drop.

Inflation

Inflation refers to when the prices of goods and services go up and the value of the dollar goes down. This means mortgage lenders giving out loans will lose money, since a dollar today will be worth less than a dollar five years from now. If inflation is on the horizon, you’ll pay higher mortgage interest rates.

Federal Reserve Board Actions

The U.S. Federal Reserve Board has the power to set the Federal Funds Rate, which dictates in part what private lenders will charge for home mortgage financing. When the Fed increases the Federal Funds Rate, mortgage rates will go up. When it cuts it, expect consumer borrowing rates to fall as well. The way the Fed influences the Federal Funds Rate is a bit complex, and the mechanisms which they use are often immaterial - what you should pay attention to in the headlines is what the rate is at and what the Fed is trying to get it to be.

Federal Lending Rules

Most private lenders end up selling their mortgages on the secondary market to government sponsored enterprises, such as Freddie Mac and Fannie Mae, or they get them insured by the FHA. Loans that can be backed by or sold to the government carry lower interest rates. But in order to be eligible, mortgages must be conforming loans. If a rule changes such that your mortgage isn’t conforming when you originate it, you’ll pay more.

These are some of the factors to keep an eye on if you’re planning on buying or selling a home in the next few months or years. But like the stock market, it’s impossible to predict mortgage interest rates with 100% accuracy. Make sure that you prioritize other factors in addition to potential changes to mortgage interest rates.