Why Do Mortgage Interest Rates Fluctuate?

If you’ve ever wondered why mortgage rates change constantly, you’re not alone. Many assume that if the Federal Reserve (Fed) lowers its interest rate to near zero, mortgage rates should follow. However, mortgage rates are influenced by multiple factors, all tied to the fundamental principle of supply and demand in financial markets.

Key Factors That Influence Mortgage Rates

1. Inflation

Inflation reduces the purchasing power of money over time, meaning the same dollar buys less in the future. To protect their investments, lenders increase mortgage rates during periods of high inflation. This ensures they still earn a return on the money they lend, even as the value of that money declines over time.

2. The Bond Market & Mortgage-Backed Securities (MBS)

Mortgages are bundled into mortgage-backed securities (MBS) and sold to investors. These securities compete with other investments, such as government bonds.

• When inflation rises, bonds become less attractive because their fixed returns lose value over time.
• Lower demand for bonds leads to higher yields (the return investors demand), which in turn pushes mortgage rates higher.
• The 10-year Treasury bond yield is often used as a benchmark for mortgage rates—when it rises, mortgage rates tend to rise as well.

3. Economic Growth & Market Demand

The state of the economy plays a big role in mortgage rates.

• Strong Economic Growth ? More people buy homes, increasing demand for mortgages. Higher demand allows lenders to charge higher interest rates.
• Stock Market Trends ? In booming markets, investors prefer stocks over bonds, reducing demand for MBS and pushing rates higher.
• Recession or Market Uncertainty ? Investors move money into safer assets like bonds and MBS, increasing demand and pushing mortgage rates lower.

4. Federal Reserve Policy & Liquidity

While the Fed does not directly set mortgage rates, its policies impact the availability of money in the economy.

• When the Fed raises rates, borrowing becomes more expensive, slowing economic activity and often leading to higher mortgage rates.
• When the Fed lowers rates, borrowing becomes cheaper, but mortgage rates may not always follow directly due to other market forces.

The Bottom Line

Mortgage rates move up and down based on inflation, investor behavior, and overall economic conditions. While they often trend alongside the Fed’s decisions, they are ultimately determined by how money flows in financial markets.

Do you want to know how you can lock in a low rate or how to navigate around a fluctuating or high rate. Message me back and we'll break it down for you!