What drives mortgage rates to change?

What Really Drives Mortgage Rates Up and Down?

Mortgage rates can be frustrating.

You may see one rate advertised online, receive a completely different quote from a lender, and then discover that rates have changed again the next day—or even later the same day.

Why does this happen?

Mortgage rates aren't determined by one single factor. They are influenced by financial markets, inflation and the economy, the lender you choose, and the details of your individual loan.

Understanding these factors can help you make a smarter decision about when to lock your rate and which lender to choose.

The 3 Major Factors That Determine Your Mortgage Rate

The interest rate and loan price you're offered generally come down to three things:

1. The economy and financial markets — especially inflation and the mortgage-backed securities market.
2. The lender you choose — lenders can have significantly different pricing, margins and fees.
3. You and your loan — credit score, down payment, property type, loan amount, occupancy and other factors can affect your pricing.

Let's look at each one.

1. The Economy and Financial Markets

The overall direction of mortgage rates is heavily influenced by what's happening in the U.S. economy and financial markets.

Strong economic growth and persistent inflation generally create upward pressure on mortgage rates.

Slower economic growth and declining inflation can create downward pressure.

But mortgage rates aren't simply set by the Federal Reserve.

One of the most important markets to understand is the market for mortgage-backed securities.

Mortgage-Backed Securities Help Drive Mortgage Rates

Most mortgage lenders don't intend to keep every home loan they originate for the next 30 years.

After loans close, many are eventually pooled together and sold into the secondary mortgage market. These pools of mortgages can become mortgage-backed securities, commonly called MBS.

MBS are fixed-income investments purchased and traded by investors.

The prices investors are willing to pay for these securities play an important role in the mortgage rates lenders can offer consumers.

Here's the basic relationship:

MBS prices rise → mortgage rates generally improve

MBS prices fall → mortgage rates generally increase

This is one reason mortgage rates can change so quickly.

The MBS market trades throughout the day. If market conditions change substantially, lenders may reprice their rate sheets—even if they already issued rates earlier that morning.

Inflation Is One of the Biggest Enemies of Low Mortgage Rates

If you're following mortgage rates, pay close attention to inflation.

Why?

Mortgage-backed securities provide investors with a stream of future payments. Inflation reduces the purchasing power of those future dollars.

When investors become concerned that inflation will remain high, they generally demand higher yields to compensate for that risk.

Higher required yields can translate into higher mortgage rates.

Conversely, when inflation appears to be slowing, mortgage rates may have room to improve.

That's why inflation reports can sometimes cause significant mortgage-rate movement.

Economic Reports Can Move Rates Quickly

Mortgage markets are constantly reacting to new economic information.

Reports involving inflation, employment, wages, consumer spending and economic growth can all influence investor expectations.

But there's another important point:

The market doesn't just react to whether an economic report is good or bad. It reacts to whether the report is better or worse than investors expected.

Suppose investors expect inflation to fall substantially, but the new report shows inflation barely improved.

Inflation may technically be declining, but the disappointing report could still push mortgage rates higher.

That's why predicting short-term mortgage-rate movements is extremely difficult.

What About the Federal Reserve?

This is probably one of the most misunderstood parts of mortgage rates.

You've probably heard:

"The Fed cut rates, so mortgage rates should go down."

Not necessarily.

The Federal Reserve directly controls certain short-term interest rates. A 30-year fixed mortgage is a much longer-term financial instrument and isn't directly set by the Fed.

However, Fed policy can still have a major indirect effect on mortgage rates.

Markets pay close attention to what the Federal Reserve says about inflation, economic growth and future monetary policy.

If investors believe Fed policy will successfully bring inflation down, longer-term rates—including mortgage rates—may improve.

If investors become concerned that inflation will remain elevated, mortgage rates can rise.

This means mortgage rates can occasionally increase after a Fed rate cut or decrease even when the Fed hasn't cut rates.

The financial markets are always looking ahead.

Supply and Demand Matter Too

Mortgage-backed securities are investments, so supply and demand matter.

When investors have strong demand for MBS, their prices generally rise, which can help mortgage rates improve.

When investors demand higher returns to own mortgage-backed securities, MBS prices can decline and mortgage rates can rise.

During periods of economic uncertainty, investors may move money toward high-quality fixed-income investments. During other periods, stronger economic growth or inflation concerns may cause investors to demand higher yields.

This constant tug-of-war is one reason rates move every day.

2. The Lender You Choose Can Make a Big Difference

The financial markets establish the general mortgage-rate environment—but every lender doesn't offer the same price.

This is extremely important when you're shopping for a mortgage.

Different lenders have different:

• Profit margins
• Operating expenses
• Loan officer compensation structures
• Investor relationships
• Loan programs
• Pricing adjustments
• Rate-lock policies
• Lender fees

Two lenders can therefore quote substantially different prices for essentially the same loan on the same day.

That's why you shouldn't assume the first rate quote you receive is automatically competitive.

And don't shop only the interest rate.

A lender can advertise an attractive rate while charging substantial points or lender fees to obtain it.

The better comparison is:

Interest rate + lender fees/points = the real price of the loan

When comparing lenders, ask for the same interest rate whenever possible and compare what each lender charges—or credits you—for that rate.

3. Your Loan Details Affect Your Rate Too

Finally, there's your individual transaction.

Even when two borrowers contact the same lender on the same day, they may not receive identical pricing.

Factors that can affect mortgage pricing include:

• Credit score
• Loan-to-value ratio
• Down payment or equity
• Loan amount
• Property type
• Primary residence, second home or investment property
• Purchase versus refinance
• Cash-out versus rate-and-term refinance
• Loan program
• Number of units
• Rate-lock period

This is one reason advertised mortgage rates can be misleading.

That eye-catching rate you see online may be based on assumptions that don't match your transaction—or it may require paying points to obtain it.

Why Mortgage Rates Can Change During the Day

Mortgage rates aren't static.

Financial markets are constantly digesting new information, including economic reports, inflation data, geopolitical events and comments from Federal Reserve officials.

If MBS prices move enough, a lender may issue new pricing during the day.

That can work in either direction.

Rates can improve.

Rates can get worse.

And sometimes they can move surprisingly fast.

Until your mortgage rate is locked, your pricing is generally subject to market movement.

Should You Try to Time the Bottom?

Everyone would love to lock their mortgage at the absolute lowest rate of the year.

The problem is that nobody consistently knows where that bottom will be until after it has already happened.

Instead of trying to perfectly predict interest rates, concentrate on the loan's overall economics.

Ask yourself:

Does this rate and loan price make financial sense for me today?

If it does, locking may be worth considering.

Waiting for another small improvement also exposes you to the possibility that rates move in the opposite direction.

The Bottom Line: Shop the Loan Price, Not Just the Rate

Mortgage rates are driven by a combination of financial markets, inflation, economic expectations, lender pricing and your individual loan characteristics.

You can't control the bond market or tomorrow's inflation report.

But you can control which lender you choose and how carefully you compare your options.

Don't simply ask:

"What's your rate?"

Ask:

"What does that rate cost?"

Then compare the interest rate, lender fees, points and credits side by side.

A second opinion on your mortgage quote can sometimes uncover significantly better pricing—and potentially save you thousands of dollars over the life of your loan.

Get a Second Opinion on Your Mortgage Quote

Already have a Loan Estimate or rate quote from another lender?

I'll help you compare the numbers line by line—rate, points, lender fees and overall loan price—so you can see what you're actually being offered.

No sales pressure. Just straightforward mortgage numbers explained clearly.