Posted by Larry Finkelberg (NMLS ID #186345) ● January 20, 2020

What Makes Mortgage Interest Rates Go Up and Down?

what makes mortgage interest rates go up and down?

One of the most common homebuyer questions is, “What makes mortgage interest rates go up and down?” Understanding the market and the factors that impact interest rates can help predict when rates will rise or fall; however, it is impossible to predict with 100% accuracy. 

The top three factors that drive mortgage interest rates include:

  1. Mortgage-Backed Securities (MBS) – Like any stock or bond, demand is the driving force.  If demand is high for MBS, the price goes up and yields (i.e. rates) drop.  If demand is low for MBS, the price goes down and yields increase.  
  2. Inflation – If inflation is increasing or forecasted to do so, mortgage rates will rise to cool the economy.  
  3. The Fed (Federal Reserve Bank) – When the Fed makes a change to interest rates, that change is to the Fed funds rate.  The Fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight.  When the Fed funds rate is cut, it is done to stimulate the economy which is inflationary.  When the Fed funds rate is increased, it combats inflation. 

A common misconception is that mortgage rates are driven by the 10-year Treasury because of how closely MBS trends to the 10-year Treasury, but they are not directly linked.  It’s easy to understand the misconception: both are long-term, fixed-return investments, and, just like Treasuries, MBS are considered a “safe” investment usually at a lower rate of return.  Whenever there are concerns about the economy or stocks are selling-off, investors will make a “flight to safety”.  In other words, selling off stocks and buying into the safe-haven of bonds. 

We're here to help you navigate the ups and downs of mortgage interest rates

Mortgage rates can be quite complex, but we’re here to help! If you’d like to better understand mortgages rates and how they impact your short- and long-term financial goals, contact me today via email or phone at (240) 238.2402. You can even send me a direct message on my Facebook page


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Topics: Interest Rates, Mortgage Interest Rates