Why Do Mortgage Rates Change?

On December 16th, 2015 the Federal Reserve increased interest rates for the first time in a decade. But how does that effect the mortgage industry and the cost of buying a house? The short answer is, in this latest increase, not much. The more important question is, why do mortgage rates change at all?

Have you ever wondered what makes the mortgage rate world go ’round?  Why, when the Fed lowers “the rate”, mortgage rates don’t always follow?

First, mortgages by their very nature are long term investments.  When the Fed lowers “the rate” they are lowering the short term rate that banks charge each other to borrow money.  So when this rate is lowered it would make more sense that short term borrowing rates will go lower, like credit card rates or auto loan rates – not necessarily mortgage rates.

Mortgage rates, on the other hand, are affected by buying and selling of 10 year Treasury Bonds (AKA: 10 Year T-Bill) and Mortgage Backed Securities (MBS).  When people invest heavily in the 10 Year T-Bill and MBS, the rate of return declines on these investment vehicles (the law of supply and demand).  When this happens, the mortgage rates also tend to decline.  So, when people pull their money out of traditional stocks to invest in more stable bonds, the mortgage rates can and do sometimes move lower.  Conversely, when people stop buying bonds and start investing in the traditional stock market, mortgage rates have a tendency to inch upwards.

Also keep in mind, mortgage rates often change several times within the course of a single day, not only because of the buying and selling of Bonds and MBSs, but also because of economic, world and political news.  For instance, in the aftermath of the earthquake in Japan, the US and NIKKEI stock exchanges declined and there was a surge into the safety of US Treasuries.  As a result, mortgage rates took a downward swing as well.  On the other hand, when Egypt was in crisis, predictions were made that the resultant instability would lead to a downturn in rates, but that did not materialize and the stock, the bond market and mortgage rates stayed fairly stable.

Our best advice?  Listen to your mortgage professional.  They watch the mortgage trends very carefully, all day, every day and know better than most where the rates are trending.

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