What makes mortgage rates change?
With the frenzy of homebuying that began two years ago was ignited by a perfect storm of factors, not the least of which was the temptation of historically low mortgage rates. The rates have gently nudged upwards but the reason that home loan rates move up and down might not be clear. New Home Inc. wants to offer clarity to the question of what makes mortgage rates change.
It’s not the Feds.
Here’s a major point of confusion about what makes mortgage rates change. Everyone looks to the Federal Reserve Bank as the all-powerful voice behind the curtain. While the members of the Federal Reserve Bank have some influence on mortgage rates, they do not set them. What they DO control is the Fed Funds Rate, which is the interest rate at which financial institutions (banks and credit unions) borrow money from each other in order to meet customers’ needs, like short-term loans and withdrawals. However, this short-term interest rate does not impact long-term financing, like mortgages.
You’ve probably also heard about a “prime rate”. Don’t confuse it with the Fed Funds Rate. Each bank decides on its prime rate, which is the interest rate for lending money to customers with good credit. These financial institutions frequently set their prime rate according to the Fed Funds Rate, often a few percentage points higher than the Fed Funds Rate. Your credit cards, for example, reflect the prime rate. If you have a good credit rating, you get a lower interest rate on your credit card balance.
Look at Mortgage-back Securities
Home loan rates are actually determined by investors who purchase mortgage-backed securities (MBS). These investments are bonds that are backed by mortgages in the United States. As bonds are traded in the stock market, the MBS pricing changes—up and down. MBS are traded every day, so the rate is in constant flux. Every type of mortgage is affected: conventional, jumbo, FHA, VA, and USDA loans.
Demand doesn’t raise the price
In some industries, like lumber, when demand goes up, the price follows suit. In mortgage bonds, the opposite occurs. When the demand for mortgage bonds increases, the price does the same. However, mortgage rates fall in response. Mortgage-backed securities go in the opposite direction of the mortgage rates.
It doesn’t make sense in our commonly held understanding of supply and demand, right?
Tim Lucas, editor for The Mortgage Reports, explains the process.
“Demand for mortgage bonds can change for a multitude of reasons, but the most common driver of demand is risk–avoidance. Most mortgage–backed bonds are guaranteed by the U.S. government, therefore, they’re considered ‘extra safe’. Default risk is practically nil with U.S. government–backed debt.
“During periods of economic or political uncertainty, U.S. mortgage bonds tend to be in high demand. Its trading pattern is known as a ‘flight–to–quality’ and it’s a fairly common one. When there’s a bona fide flight–to–quality going on, consumer mortgage interest tends to drop.”
When the Fed buys government securities, it actually pumps cash into the economy. In 2020 and 2021, the Feds bought billions of dollars of consumer mortgages to keep mortgage rates low. With more available cash, banks aren’t at liberty to raise interest rates. Conversely, when the Fed sells government security (MBS), it reduces the amount of cash in the system, so banks can raise their interest rates.
At some point, when the economy improves, the government will no longer intercede, and rates will go up. We’re seeing that trend now.
Mortgage myths: Factors that don’t make mortgage rates change
There’s a lot of confusion out there about what factors make home loan rates go up or down. Let’s clear this up by looking at the factors that don’t impact mortgage rates.
The 10-Year Treasury Note
Contrary to popular belief, mortgage rates do not change according to the 10–Year Treasury Note. According to mortgage expert Lucas, “The 10–Year Treasury Note is a debt–issuance from the U.S. Treasury and, over time, the 10–year note and mortgage–backed bonds will trend together; but, on any given day, the two can diverge. Therefore, you can’t watch the yield of the 10–Year Treasury Note and know in which direction mortgage rates are moving with certainty.”
So, why do people use the Treasury Note as a measuring stick? Lucas explains, “One of the reasons why people like to say that mortgage rates track the 10–year is because access to real–time MBS data is expensive whereas data on the 10–Year Treasury Note is as close as turning to CNBC.”
If you want an accurate predictor of what makes mortgage rates change, pay attention to MBS prices.
Congress doesn’t dictate mortgage rates either.
Don’t direct credit or blame at your elected officials for the current mortgage interest rates. While they create legislation and might spark demand for MBS, this government body has no say in the rise and fall of those figures.
Shop Smart For Your Mortgage
Now that you have a better understanding of what makes mortgage rates change, you can shop for a mortgage with more confidence. And you should shop around! There are so many lenders and mortgage programs available that you owe it to yourself to explore all the possibilities. If one lender says “No”, don’t be discouraged. Keep looking! If you have questions, check out our article on How Much Mortgage Can I Afford?
Pay attention to the rates for the loan programs you’re considering, but don’t ignore the closing costs. A lower-interest loan may come with higher closing costs and vice versa.
Also, find out the option for locking in the interest rate. Some lenders allow you to hold onto an interest rate for 30 days or more. There could be a price to that feature, so be sure to know what’s involved. Even though mortgage rates are changing, now is still a great time to buy.
If a new construction home in Raleigh and the surrounding area is what you’re considering, New Home Inc. has both townhomes and single-family homes for sale in Raleigh, Fuquay-Varina, Selma, and Apex, NC. We’re building communities of new construction homes with the standard features you want, including energy efficiency, indoor air quality, and smart home automation. Our “Future-Proof” approach to design and construction combines knowledge of how you live in your home—what really matters in terms of flow and features. Let us show you how New Home Inc. makes homebuying easier! Contact us to make this date night one to remember.