Why Mortgage Rates Fluctuate

Mortgage interest rates fluctuate a bit differently than other, shorter term consumer loan rates. Credit cards, personal and auto loans typically fluctuate with lender cost of funds and prevailing short-term market rates. Mortgage rates change with the national economy strength or weakness, economic forecasts, Federal Reserve controls of the money supply and lender competition.

The Economy

opens in a new windowEconomic growth or contraction can increase or decrease mortgage interest rates. Those mortgage lenders who immediately sell most or all of their loans into the secondary market must adjust their retail rates immediately to ensure making a profit. Economic growth generates increasing interest rates, a by-product of natural inflation increases that result. Conversely, economy weakness puts downward pressure on market rates, causing mortgage lenders to respond with rate decreases.

Economic Forecasts

Lenders try to keep up by evaluating economic predictions and forecasts. Mortgage lenders analyze both short- and longer-term predictions to anticipate how the economy may perform, which will increase/decrease interest rates in the future.
For example, if predictions of both short- and long-term economic growth are accurate, mortgage rates will likely tick up, as will inflation. Lenders hope to “stay ahead of the curve” by agreeing or disagreeing with market forecasts.

The Fed and Money Supply

opens in a new windowFederal Reserve money policy has a direct effect on mortgage rates. The Fed adjusts the money s

upply to encourage economic growth or cutbacks. The volume of money in circulation typically increases or decreases mortgage interest rates.

Competition

Lender competition also causes rates to fluctuate. To generate higher volume, lenders will “shave” profits to offer lower rates. Conversely, lenders having sufficient volume may increase rates a bit to increase profit and slow application volume. These factors all influence the fluctuation of mortgage rates. Sometimes rates don’t fluctuate for months at a time; other market conditions can cause mortgage rates to fluctuate multiple times in a day. Prospective borrowers should pay attention to these fluctuations, as they might affect the rates they lock at application.

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