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Why Do Mortgage Rates Change?
To understand why mortgage rates change we must first ask the more general question, "Why do interest rates change?" It is important to realize that there is not one interest rate, but many interest rates!
Prime rate: The rate offered to a bank's best customers
Treasury bill rate: Treasury bills are short-term debt instruments used by the U.S. Government to finance debt. Commonly called T-bills they come in denominations of 3 months, 6 months, and 1 year. Each treasury bill has a corresponding interest rate.
Treasury notes: Intermediate-term debt instruments used by the U.S. Government to finance debt. They come in denominations of 2 years, 5 years, and 10 years.
Treasury bonds: Long-debt instruments used by the U.S. Government to finance debt. Treasury bonds come in 30 year denominations.
Federal Funds rate: Rates banks charge each other for overnight loans.
Federal Discount rate: Rate New York Fed charges member banks.
6 month CD rate: The average rate you get when you invest in a 6 month CD.
Fannie Mae-Backed Securities: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie-Mae backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Securities: Ginnie Mae pools large quantities of mortgages, secures them sells them as Ginnie-Mae backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduced, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.
This leads to a fundamental concept:
* Bad news (i.e. slowing economy) is good news for interest rates (i.e. lower rates).
* Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with growing
economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down to reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real estate prices, higher rent on apartments and higher mortgage rates.
Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower interest rates even though interest rates may have moved up!
There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price maturity - typically $1,000. If the price of the bond is currently $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of the interest over the next 5 years, such that a lower price (e.g. $800) will result in the same price maturity price (e.g. $1,000).
| Economic Events | Effect on Interest Rate |
Significance of Event |
| Consumer Price Index (CPI) Rises | Indicates rising inflation | |
| Dollar Rises | Imports cost less, falling inflation | |
| Durable Goods Orders Increases | Indicates expanding economy | |
| Gross National Product Increase | Indicates strong economy | |
| Home Sales Increase | Indicates strong economy | |
| Housing Starts Rise | Indicates strong economy | |
| Industrial Production Rises | Indicates strong economy | |
| Business Inventories Rise | ¯ ¯ ¯ | Indicates weak economy |
| Leading Indicators (LEI) Increases | Indicates strong economy | |
| Personal Income Rises | Indicates rising inflation | |
| Personal Spending Rises | Indicates rising inflation | |
| Producer Price Index Rises | Indicates rising inflation | |
| Retail Sales Increase | Indicates strong economy | |
| Treasury Auctions has High Demand | High demand leads to lower rates | |
| Unemployment Rises | Indicates weak economy |
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"With all the different loans programs available I didn't know the best program for me. With the help of my Grand Oak Mortgage Company Loan Officer I ended up with a loan program that saved me nearly $100/month on my house payment" - Mr. & Mrs. Wink
"The staff went up and above any of our expectations. Explaining everything step by step, very professional and helpful" - Dale Gohn & Kristie Tickle
"As a first time home buyer I was very unclear on what was involved in applying for a mortgage and what points and closing costs really were. Grand Oak Mortgage Company took the time to explain and educate me and my wife on the entire mortgage process" - Mr. & Mrs. Zlotnik
"Thank You Grand Oak Mortgage, my loan experience was all that you said it would be, fast and hassle-free" - Mr. & Mrs. Babcock
"Grand Oak Mortgage was great to deal with. Everytime, I spoke with them they were very upbeat and happy. It was a real pleasure dealing with such a great staff. They were very patient with me even when they had to explain things to me twice" - Mr. Passalacqua
"My Loan Officer was very helpful and all for us, she gave us insight into the ins and outs of the business" - Mr. & Mrs. Gonzalez
"Grand Oak Mortgage was very helpful, we want to thank them for getting us in our house. Very good company, who cares about their clients" - Mr. Zak
"With all the different loans programs available I didn't know the best program for me. With the help of my Grand Oak Mortgage Company Loan Officer I ended up with a loan program that saved me nearly $100/month on my house payment" - Mr. & Mrs. Wink
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