What Drives Mortgage Interest Rates

Interest Rates area factor of supply and demand for money or credit. An increase in the demand will cause rates to RISE. Conversely, a decrease in supply will cause rates to RISE.

A decrease in demand will cause rates to FALL. Conversely, an increase in supply will also cause rates to FALL. A slower housing market contributes to a slower economy. Interest keeps the economy moving by encouraging people to borrow, lend and to spend.

A strong economy equals higher inflation, which is often bad news for interest rates. When inflation rates increase, interest rates will often RISE.

Interest rates are sensitive to inflation. Low interest rates depend on low inflation in order for rates to FALL.

The Federal Reserve, known as “The Fed”, often lowers the prime rate in a slow economy to increase more spending.

By controlling the flow of cash through the economy, The Fed attempts to keep inflation under control. Rates typically FALL when The Fed announces they will be keeping short term rates low.

Good news for the world could also be bad news for mortgage bonds. The interest rates RISE when the global economy is stable.

A stable economy provides a “safe haven” during times of global crisis.  The interest rates will FALL when global events like war, weather, pandemic or political instability exist.

Again, what’s good for the planet is bad for Bonds. But when buyers are attracted to our markets for safety, the flood of investment creates a favorable environment for interest rates.

The stock market and interest rates can have an inverse relationship. When investors put money into an increasing stock market, money will move out of bonds causing bond prices to drop, which causes interest rates to RISE.

Bonds and mortgage securities compete for the same investors, so the performance of the bond market can affect the availability of money to the economy. In a decreasing stock market, bond prices will rise, causing interest rates to FALL.