What Causes Home Loan Rates to Move Up and Down?

The Federal Reserve (Fed) monitors the U.S. economy and, when necessary, takes steps to address inflationary concerns to avoid economic recession. When the Fed discusses interest rates, it is primarily concerning the Fed Funds Rate, which is the rate banks use when lending money to each other overnight.

Home loan rates, on the other hand, are dictated by the trading of Mortgage Backed Securities (MBS or Mortgage Bonds), which are a type of bond.

At the real heart of home loan rate movement is the dual relationship between Stocks and Bonds, as they compete for the same investment dollars on a daily basis. Inflationary pressures, economic conditions, and geopolitical events all influence the direction of Stocks and Bonds.

When economic reports are weak or disappointing, investors often move their money from riskier investments like Stocks into Bonds, which are considered safer. Since home loan rates are tied into Mortgage Bonds, this helps home loan rates improve and go down.

In contrast, strong economic news often causes investors to move their money into Stocks to take advantage of any gains. This can cause Mortgage Bonds and home loan rates to worsen, or in other words, the home loan rates go up.

Inflation also plays a role as it reduces the value of fixed investments like Bonds. This means that a low inflation environment tends to be good for Mortgage Bonds and home loan rates (think lower rates), while high inflation can cause both to worsen (think high rates).

Political turmoil or economic crises around the world can also cause investors to move their money into the safety of the Bond markets, helping Mortgage Bonds and home loan rates improve.

If you’re trying to decide if now is a good time to purchase a new home, visit with our Mortgage Center or call your neighborhood mortgage expert! We’ll analyze your financial situation together and create a plan that’s right for you.

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