What Causes Mortgage Rates To Fluctuate

Mortgage rates fluctuate every day based on what investors of Mortgage Backed Securities (MBSs) are willing to pay on the open market. The market for MBSs is similar to how other stocks and bonds are bought and sold. I will go into more detail below, but one thing to keep in mind is anything that is public knowledge has already been priced into the market by investors. 

Before going into details on what economic factors impact MBSs and thus mortgage rates it is important to note that when you take out a conventional (Freddie Mac and Fannie Mae), FHA, VA, or USDA mortgage it will almost certainly be bundled with other similar mortgages and sold on the secondary market as an MBS. You will make your payments to a mortgage servicer, often the same company that originated your mortgage, or servicing can be transferred to a different servicer. The servicer only keeps a tiny portion of the interest you are paying to handle the logistics of the debt and the rest goes to the investor that owns the MBS. All lenders have similar mortgage rate because mortgage rates are a commodity, similar to oil and gold. The difference in rates from individual lenders boils down to the amount of their overhead and their profit margins. It is very similar to how gas stations price a gallon of gas. All of the gas stations in a town are typically going to typically be within 5 or 10 cents a gallon of each other. Similarly mortgage lenders are typically going to be within 0.25% - 0.5% of each other for the same loan program. 

A good rule of thumb for how a specific event or report will impact mortgage rates is that, in general, things that are bad for the stock market are good for MBSs. This is because MBSs are viewed as a low risk investment tool with stable returns. When something happens that makes many investors want to lower their risk they will often sell stocks and purchase MBSs or other low risk bonds. This increases the demand for MBSs and cause mortgage rates to decrease as lenders can now sell MBSs with lower rates for the same return. Major world events (war, natural disaster, political events), jobs reports, inflation reports, FED meetings, consumer confidence reports, and GDP reports are amongst the largest market movers. Inflation is the one major market mover that doesn't follow the general rule of thumb as high inflation is both bad for mortgage rates and bad for the economy as a whole. 

The Federal Reserve (FED) and the Federal Funds Rate are brought up often in the media when discussing mortgage rates and interest rates in general. You will often see news stories about what the FED is planning to do in the future with the Fed Funds Rate. It is important to remember that anything the media knows about what the FED may do in the future is already priced into current mortgage rates by investors. So if the FED is likely to lower the Fed Funds Rate at an upcoming meeting the implications of that action have already impacted mortgage rates. Unless there is a surprise at a FED meeting in regards to the Fed Funds Rate the FED action will have minimal impact on current mortgage rates. There is always a press conference after each FED meeting where the FED chair will answer questions and comment on FED decisions and trajectory of future actions. This is typically what moves the market after a FED meeting. To put it simpler, if we know the FED is very likely to lower the Fed Funds Rate by 0.25% at the next FED meeting that will be priced into rates well ahead of the meeting and there is no reason to wait for the meeting to lock in an interest rate. In fact, we often see mortgage rates increase after a FED meeting in which the FED lowers the Fed Funds Rate because the comments by the FED chair may reduce future optimism amongst investors of MBSs. It is also important to note that the Fed Funds Rate is the rate that banks can borrow funds from the government. The Fed Funds Rate causes a trickle down effect that will impact interest rates in general on most things, but the FED is not in any way setting the rates on mortgages or anything else outside of what banks can borrow funds from the government. Further, the main purpose of the FED is a balance between controlling inflation and influencing economic activity. When inflation is high the FED will often raise or hold the Fed Funds Rate steady, and decrease it when inflation is coming down to encourage economic spending (when interest rates are lower more people and companies are willing to spend money). The FED does have  additional tools in their tool belt that also impacts mortgage rates. These are Quantitative Easing (QE) which is when the FED actively buys bonds, including MBSs increasing demand and lowering rates, and Quantitative Tightening (QT) which is where the FED actively sells bonds including MBSs that they previously purchased (increasing supply and thus increasing mortgage rates). 

It is important to note that we live in a global economy. Things that happen around the world will impact mortgage rates here. Many other countries have central banks, like the Federal Reserve, and their policies will impact us here. As will global events that impact other markets. 

There are several other investment options similar to MBSs. The one with the greatest correlation to mortgage rates are treasury bills (T-Bills) which is debt issued by the government. If the government issues a large amount of T-Bills that will often have a negative impact on mortgage rates as the total supply of low risk bonds has increased the market. Another impact, especially in the short term, is the amount of investors in the market. We often see bigger fluctuations in mortgage rates near long holiday weekends and in the summer in general as many investors are not working. This is because when there are less investors active on a daily basis each trade has a larger impact on daily rates.

I want to end with the fact that there is often no rhyme or reason in the short term to mortgage rates. Investor sentiment has a large impact on current rates, and there isn't always a concrete reason for why investors are willing to pay the current market price for mortgage debt. There are "experts" in the mortgage industry who's entire job is to predict and comment on the trend of mortgage rates. The best of these "experts" tend to guess correctly on the direction of mortgage rates about 55% of the time in the short term. The short term meaning what mortgage rates will do within the next couple months. For this reason my general advice when you have an accepted offer on a purchase is to lock the rate early to limit risk. And on a refinance if the numbers make sense and the savings are significant enough that you'd be upset if rates went up causing you to not be able to refinance at the current rate, you should move forward and lock in. In both scenarios if rates fall int he future you can look at a refinancing.