If you've been following mortgage rates in order to pick the perfect time to refinance or to apply for a home loan, you may have noticed that rates fluctuate daily. Mortgage rates change for a variety of reasons, all related to current economic conditions and the willingness of investors to purchase mortgage-backed securities.
Mortgage investors
The simplest explanation--although not the only factors that determines mortgage rates--is that rates are closely tied to movements in bond markets. As bond prices rise, their yields fall, and it is these yields which influence mortgage rates up or down.
While some mortgage funds come from deposits held at banks and brokerages, most come from investors. Mortgage investors are interested in earning the highest possible interest rate (“yield”), while mortgage borrowers are looking for the lowest possible interest rate. Yields need to be high enough to make the investment valuable, but low enough to attract borrowers.
Since mortgage investors are looking for a fixed-income investment, rates increase or decrease according to the competition for investors in these and other bonds.
Mortgage rates and Treasury bonds
There is no specific link between mortgage rates and Treasury bonds, but the latter are often the benchmark for other bonds since they are backed by the federal government and considered “risk-free.” Since Treasury bonds are 100 percent guaranteed and mortgage bonds are not, mortgage rates are typically set a little higher to compensate for their higher risk.
The difference between Treasury bonds and mortgage rates varies according to market conditions and sometimes one will rise (or fall) faster than the other.
Mortgage rates and market forces
In a normal market, without government intervention, mortgage rates would depend to a great extent on supply and demand. For a time, the Federal Reserve and Treasury were purchasing mortgage-backed securities (MBS) from Fannie Mae, Freddie Mac and Ginnie Mae along with certain MBS from other investors, who wanted to sell some of their holdings and were not willing to buy any new MBS, clogging up the mortgage market.
Since the Federal Reserve stopped purchasing these securities, investor interest in new high-quality MBS has returned; this demand, coupled with a weak economy, low inflation and a very weak housing market are all serving to keep interest rates low.
Michele Lerner contributed to this answer.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.
