Why Do Mortgage Rates Change?

Mortgage rates change due to economic conditions that exist in the financial markets.  In reality, mortgage rates may or may not change if other types of interest rates do change..that's right, other interest rates.  These other rates are:

 

-      Prime Rate:  The rate offered to a bank's customer.

-      Treasury Bill Rates:  Treasury bills (T-Bills) are short term debt instruments the U.S. Government uses to finance the national debt.  They are issued in various types such as 3 month, 1 year, and each corresponding period has a different rate.

-      Treasury Notes:  Mid-term debt instruments used by the U.S. Government to finance the national debt.  These are usually issued in 2 year, 5 year, and 10 year increments.

-      Treasury Bonds:  These are long term debt instruments used the U.S. Government to finance the national debt.  These usually come in 30 year terms.

-      Federal Discount Rate:  This is one everyone hears about when the Federal Reserve (FED) raises their rate.  This is the rate banks are charged for borrowing from the FED.

-      Federal Funds Rate:  This is the rate that banks charge each other for overnight loans to each other.

-      LIBOR:  The London Interbank Offered Rates.  This is the average London Eurodollar rate.

-      6 Month CD Rate:  The average rate you will receive when you invest in a 6 month Certificate of Deposit (CD).

-      11th District Cost Of Funds:  The rate determined by averaging a composite of other rates in the 11th District of Federal Reserve.  Many consider this the most stable district.

-      Fannie Mae Backed Security Rates:  Fannie Mae pools large quantities of mortgages, packages them as securities and then sells them as Fannie Mae backed securities.  This is the primary influence for mortgage rates.

-      Ginnie Mae Backed Securities Rates:  Ginnie Mae pools large quantities of mortgages, packages them as securities and then sells them as Ginnie Mae backed securities.  This is primary influence for FHA and VA rates.

 

Interest rates are based on the fundamentals of supply and demand.  When there is a demand for loans, it generally means there are more buyers than sellers, thus commanding a better price, i.e. higher rates.  If the demand decreases, then so do interest rates.  However, when the economy is expanding, this indicates a higher demand for credit/loans, so rates move higher.  When the economy is slow, the demand for credit decreases and rates go down to attract buyers.

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