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Refinance Purchase Home Equity

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Why Do Mortgage Rates Change?

By Eric Goodwill

Discover why mortgage rates change and which pressures drive market swings. Customers should watch government financial policies and markets daily.

Financial markets rise and fall daily in response to several factors. Global pressures, government intervention and general economic conditions throughout the United States all play a part. In addition, mortgage rates change because of unique inflationary considerations.

Mortgage Rates Change in Response to Global Pressures

The United States sells government notes and bonds through worldwide financial markets. These debt instruments are similar to loans made by the U.S. The amount of loans created and accepted by the U.S. affects future interest rates just as a high debt load affects consumers. Mortgage rates change when the U.S. buys or sells government loans. Over the last decade, the U.S. steadily spends more than total taxes received. To cover this cash shortfall, the government continuously borrows money to cover regular operating expenses.

Domestic Government Control

The Federal Reserve controls the flow of money within the domestic banking system. Banks may borrower money from the government based on the Fed Fund Rate. This rate is determined by Federal Reserve policy. When the Federal Reserve alters the Fed Fund Rate, mortgage rates change. A decrease in the federal rate causes a corresponding drop in customer loan rates. To keep domestic rates low during periods of high borrowing, the government must loan money to banks at artificially cheap rates.

Inflation

The rate of inflation within the U.S. is also affected by the flow of money. During times in which the U.S. government borrows large amounts of money globally and floods domestic financial markets with cheap loans, business activities increase. An excess amount of money cause prices to rise because, based on a one-to-one comparison, each new dollar is worth less when compared to the total money supply.

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5. Do Mortgage Interest Rates Move In Proportion To The Fed Rate?