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• The Federal Reserve – When the Federal Reserve (The Fed) lowers "rates," it’s actually lowering the Federal Funds Rate. This is the “short-term” interest rate at which large banks lend funds to each another. However, as you know, mortgage rates are long-term rates of up to 30 years. You’d think that a change in a short-term rate wouldn’t have much consequence on a long-term one. But it does – thanks to inflation. When short-term rates fall, like the ones the Fed controls, borrowing and spending usually increase, which can spur inflation. And when inflation increases, longer term rates, like mortgage interest rates, can rise. It’s an indirect relationship just like so many of the factors that affect mortgage rates.
  
  
• COFI And LIBOR – The COFI, or Cost Of Funds Index, is a measure of how much interest banks have to pay on sources of money (such as savings accounts or CDs) they use for mortgage funding. If fewer people put their money in savings accounts, which generally pay little interest, and place more money in higher-paying Certificates of Deposit, banks may increase mortgage rates to offset the higher interest cost being paid to their account holders. The LIBOR (London Interbank Rate) reflects the interest rate on money loaned among different banks. This also causes changes in how high mortgage rates are set, although it is not as direct.
  
  
• Supply And Demand – Just like everything in our free market economy, supply and demand plays a big role in rates. If there is high demand for loans, then rates typically rise. This makes sense: if there are more people looking for loans, the sellers (lenders) of that loan can demand a higher price. Of course, the opposite is also true. When there is less demand, lenders are forced to be more competitive and buyers (you) can get a better deal. So when the economy is growing, people are usually doing better financially and more apt to be house hunting. Thus, there is more competition and rates tend to rise. On the other hand, when the market slides south, there is less demand and rates usually follow suit.
  
  
• Bonds – Higher bond prices typically mean lower mortgage rates and vice versa. To make a long story short, when you get a mortgage loan from a bank, the bank will turn that loan into a bond for investors to buy. When the bond market is hot and investors are willing to pay more for those bonds, the banks can afford to drop their rates (sound familiar?). But when the bond market fizzles, they’ll need to bump up the rates on your loan (and, thus, on the resulting bonds) in order to attract investors again.
  
  
• Inflation – As we talked about in The Fed discussion, when inflation is high, you’re going to be paying more money for things. Rampant inflation typically means the economy is growing very quickly, so the Federal Reserve steps in to raise interest rates and stop the economy from overheating. So until inflation and prices get back under control, mortgage rates will typically rise with other interest rates. And when the economy slows, inflation drops and so do mortgage rates.
  
  
• Housing Prices – Higher home prices typically mean that people will need to borrow more to buy them. And if interest rates are too high, they can’t afford to get a loan for those super-expensive houses. Thus, as housing prices climb, interest rates usually come down to compensate.
  
  
• Value Of The Dollar – If the value of the dollar goes up, that’s a good sign that inflation is falling. And as we mentioned earlier, inflation typically takes mortgage rates in the same direction.
  
  
• Foreclosures - An increase in home foreclosures usually means rates are soon to follow, as banks feel they need to charge more interest to make up for their losses as well as hopefully prevent future foreclosures.
  
  
• Everything Else - In a way, every monetary transaction anywhere in the country will have some sort of an effect on the economy and a resultant effect on mortgage rates. A single positive earnings report from a big company could push stock markets higher which would temporarily draw investors away from bonds, sending mortgage rates higher. A slew of other factors, such as personal income and spending, housing starts, retail sales, gas prices, and even the political climate can have some sort of an effect on mortgage rates. To put it simply, anything that can affect the economy can also affect mortgage rates.
  
  

As you can see, it's not possible to call out any one or two factors which make mortgage rates fluctuate; it's a combination of many direct and indirect economic factors and forces that work together to drive rates up and down.

If all this has left your head spinning, just give us a call at 1-800-734-REFI. We take pride in taking the confusion out of the mortgage process.