Why Mortgage Rates Change

Why do mortgage rates change so frequently? A few reasons:

1. Federal Reserve

The Federal Reserve, or “The Fed,” may frequently alter the federal funds rate in an effort to keep the U.S. economy stable. The federal funds rate is the interest rate that banks and other financial institutions apply to the money they lend each other for the short term, which naturally impacts the money they lend to borrowers like yourself. Keep in mind the federal funds rate is not directly tied to long-term lending rates, so the Fed moving it won’t have the same impact on mortgage rates.

2. Mortgage-Backed Securities

Most lenders sell the loans they’ve funded to investors, who often securitize pools of similar mortgages into mortgage-backed securities (MBS). MBS prices rise and fall based on changing demand. When MBSs drop in price, lenders raise their mortgage rates. When MBS prices go up, mortgage rates fall.

3. Inflation

If you’re old enough to be buying a home, you’re old enough to have noticed the American dollar doesn’t buy as much as it used to. Inflation is a gradual process, but it can still affect your rate in the relatively short amount of time it takes to move along your home buying journey. Mortgage rates will adjust along with the U.S. dollar’s buying power.

Even the top financial minds in the country can’t predict what interest rates will be at a given point in time, so you can’t expect the rate quote you received at the beginning of your process to be the same as the one you’d get now. When the time comes to lock your mortgage rate, your Envoy loan officer will be able to tell you the most accurate pricing in that moment, which may be less than what you initially discussed.