Why do mortgage rates change?Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, then the interest rates will also increase. This is because there are more buyers, so sellers (lenders) can command a better price (i.e. higher rates). However, if the demand for credit reduces, then interest rates decrease. 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 interest rates increase, whereas when the economy is slowing the demand for credit decreases and so do interest rates. This leads to a fundamental concept: a slowing economy will lead to lower interest rates, while a growing economy will lead to higher interest rates. Higher rates are also associated with a growing economy. When the economy grows too strongly the Federal Reserve increases interest rates to slow the economy down and 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 rents 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. This might sometimes result in mortgage rates moving differently from other 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 mortgage rates even though interest rates in general may have increased. Fannie Mae Backed Securities and Ginnie Mae Backed Securities also affect mortgage rates. 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 pools large quantities of mortgages, securitizes them and sells them as Ginnie Mae Backed Securities, which influence mortgage rates on FHA and VA loans. Also, the bond market has a strong influence on mortgage rates. There is an inverse relationship between bond prices and bond rates, so when bond prices increase, interest rates decrease and vice versa. This is because bonds tend to have a fixed price at maturity (typically $1000). If the price of the bond is currently at $900 and there are 10 years left on the bond, and if interest rates start increasing, the price of the bond starts decreasing. This is because the higher interest rates will cause increase accumulation of interest over the next 5 years and so the lower price of $880 will result in the same maturity price of $1000. |
We Say "YES" When Others Say "No" 857-205-1068 Centurion Funding Corp. of America 162 East Main St. Avon, MA 02322 |
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