Why Mortgage Interest Rates Fluctuate

Interest rates for home mortgage loans can change on a daily basis, and different rates are associated with various types of loans, so it is important to shop around for the best current interest rates. The following factors affect the constantly changing rates of mortgage loans:

Federal Reserve Interest Rates

The Federal Reserve has control over inflation in order to promote economic growth. The Federal Reserve does not, however, directly affect current rates. The Federal Reserve changes the rates for banks and the banks pass along the changes in rates to customers. Consumers become encouraged to borrow and spend when interest rates are low; this, in turn, boosts the economy. Higher rates, then, slow down consumer borrowing rates. Essentially, the fluctuations in mortgage loan rates is an attempt to keep the economy in balance and prevent inflation without pulling the economy down into recession.

Mortgage Investors and Changing Mortgage Interest Rates:

Other players affect the changing rates; loans are often sold in the secondary market, which is now controlled by the federal government. Mortgage lenders sell the mortgage-backed securities to investors; investors receive a return on their investments that is generated by the interest paid by the mortgage holders. The banks must charge borrowers a high enough interest rate to give the investors a return. This can drive up interest rates.

Rates will, though, eventually be driven back down. Mortgage loan borrowers want low interest rates, so this forces rates back down. Additionally, when investors know the rates will drop, they purchase these securities, which increases demand, eventually lowering interest rates. Banks have to balance between these opposing forces – the result is fluctuating mortgage interest rates.

Effects of Constantly Changing Interest Rates

Fixed-rate mortgage rates are locked in once the application process has been completed, but they continue to constantly change. The rates of a variable-rate loan change as well; the difference is that it continues to change throughout the life of the loan.

Often when lower rates are available, homeowners will choose to refinance their mortgage at a lower rate than their original loans. This involves taking out a new loan that will pay off the remaining balance of your current loan, but at the new interest rate.