<< Frequently Asked Questions (FAQ)

Why do interest rates change?

Mortgage rates change due to several factors. They are impacted by interest rates and it's important to understand that there are several interest rates such as:

 •        6 month CD rate: Average rate that you get when you invest in a 6 month CD.

 •        11th District Cost of Funds: An averaged composite of other rates.

 •        Fannie Mae Backed Security 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 strongly influence mortgage rates.

 •        Federal Discount Rate: Rate the New York Fed charges to member banks.

 •        Federal Funds Rate: Rates banks charge each other for overnight loans.

 •        Ginnie Mae Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

 •        Libor: London Interbank Offered Rates. Average London Eurodollar rates.

 •        Prime rate: The rate offered to a bank's best customers.

 •        Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30 year denominations.

 •        Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).

 •        Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.

Interest rate changes are based on supply and demand. If the demand for credit loans increases interest rates will too. If the demand for credit reduces interest rates will too. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

If there is economic bad news there will be is good news (lower rates) for interest rates.  Conversely, if the economy is robust or growing it means is bad news (higher rates) for interest rates.

A major factor driving interest rates is inflation. Higher inflation reflects a growing economy and 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 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 rates even though interest rates may have moved up.