4 reasons mortgage rates go up and down

The process of buying a home includes a lot of moving parts — but most people (first-time homebuyers included) look at current mortgage rates first. There’s a good reason: the current mortgage rate affects your monthly payments over the life of the loan.

What many home buyers may not understand is multiple factors could cause mortgage rates to go up or down. Mortgage interest rates can also vary significantly between mortgage lenders.

If you're considering taking out a home loan or a mortgage refinance, here's what you need to know about interest rates — and why they tend to fluctuate.

What causes interest rates to go up or down?

Mortgage rates move on a large scale, and on a small scale, which is why two people applying with the same lender for the same loan could have different rates.

Use an online mortgage calculator to review the differences between two mortgage rates. Low mortgage rates can help you save money each month and on the total cost of your loan.

At the macro level, several factors help determine average mortgage rates across the entire country. These factors include:

1. The Federal Reserve
2. The bond market
3. The housing market
4. Personal level effects

1. The Federal Reserve

The Fed doesn't set mortgage rates. But their decisions affect whether rates go up or down.

For example, in March 2020, the Fed reduced interest rates to near 0% to offset economic problems resulting from the COVID-19 pandemic. The rates are currently at the lowest possible rate (0.00% to .025%) until at least 2023.

This change influenced mortgage rates by affecting the price of credit to lenders. When financial institutions borrow or lend money, they negotiate mortgage rates between each other, but the Fed sets the target rates that influence these numbers. The lower borrowing rates between institutions typically trickles down to the borrower in the form of low mortgage rates.

Another way the Fed can affect mortgage rates is by increasing or reducing the money supply. The Fed is the central bank of the United States geared to create and introduce more cash into the economy. Alternatively, they could reduce the production of money.

Lastly, the Fed could adjust the rates they charge banks or alter how much cash banks must have on hand.

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2. The bond market

The bond market, or credit market, sells group debt securities, including mortgages. Investors can purchase bonds from governments or corporations.

Mortgage-backed bonds are groups of properties packaged together. Investors receive dividends from these investments several times per year. To appease investors, mortgage-backed bonds must make an adequate amount of money to pay out dividends.

When bond rates go up, mortgage rates go down. When mortgage rates go up, bond rates go down. Since the bond rates are closely tied to the treasury bond rates, mortgage-backed bonds are less valuable when mortgage rates are high. The reason for this is that when people have higher interest rates, they’re more likely to refinance, which means an investor would lose money when a loan in their bundle is replaced at a lower interest rate.

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3. The housing market

The housing market affects mortgage rates through supply and demand. More people are opting to rent than purchase, which reduces the need for new homes. Fewer customers mean that mortgage lenders are more likely to lower their rates to entice more buyers to purchase a home.

When there are more homes available, and more people are opting to purchase homes, they often raise rates. Sometimes higher rates are used to deter customers since mortgage lenders can be overwhelmed with interested buyers when interest rates drop.

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4. Personal level effects

On an individual level, factors like credit score, location, and down payment affect mortgage rates. Rates may be higher or lower in your neighborhood based on supply and demand and lender competition. Further, the rates for your mortgage loan could be higher or lower depending on your credit history, credit score, income, loan amount, and the property value of the home you want to purchase.

Additionally, the type of loan you choose will affect your mortgage rate. While variable interest rates often offer lower interest rates for a promotional period, they fluctuate with the market, and your payments could go up or down. Fixed-rate loans provide a single mortgage rate for the entire loan term.

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Today's mortgage rates

Here are the current mortgage and refinance rates as of Oct. 15 from Freddie Mac.

• Mortgage rates for 30-year fixed mortgage:
• Mortgage rates for 15-year fixed mortgage:

With these low mortgage rates, it may be a good time for you to refinance your home loan. To see how much you could save on monthly payments, crunch the numbers and compare rates and mortgage lenders using this free online tool to find your rate today.

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