When deciding whether or not to refinance a loan or start thinking about buying a home, one of the most important factors is the current interest rate. There are fixed rate loans that come in loan terms of 10,. 15, 20, 25 and 30 years and they can all have different rates. Typically, the shorter the loan term, the lower the interest rate. Adjustable rate loans and hybrids can have an initial fixed rate then adjust at a later term such as each year or every six months based upon the terms of the note. But potential borrowers soon discover that not only rates different on different mortgage types but rates can be different from one lender to the next. To complicate matters, those very same rates can be different the very next day. Rates can even change throughout the course of a business day and until the borrowers specifically tell their lender to lock in their rate, borrowers are at the mercy of the market. So, that said, why do mortgage rates change, anyway?
Mortgage rates are tied to a specific index that lenders follow throughout the day. Mortgage companies have a department specifically designed to track these indexes and set their mortgage rates accordingly. For example, a 30 year fixed rate today would be tied to a mortgage bond called the FNMA-30 coupon. This is a bond just like any other bond such as a U.S. Treasury. These bonds are available for investors to buy and sell throughout the day. Bonds don’t provide as much yield as say a high-performing blue-chip stock but that’s not why investors buy them. They buy bonds because they’re safe. The yield is low, but compared to a publicly traded stock they’re a solid investment.
Let’s not say that the stock market isn’t doing all that well and investors want to pull money out of stocks to avoid any future losses. The investors can put all their funds in cash and wait for a better market but there is no profit in cash but there is in a bond. When there is a heavy demand for the safety of bonds, the price of that bond goes up. When the price of a bond rises, the rate falls. That’s why when the markets aren’t doing very well mortgage rates can be expected to fall.
What about the Fed? Doesn’t the Fed set mortgage rates? No. The Fed raises the Federal Funds rate which is the rate that banks charge each other for very short term loans, as in overnight loans. The Fed instead provides some guidance to investors about their expectations of the economy in the near future. If the Fed raises rates, it’s because there is an expectation of a strong economy. When the Fed lowers rates, the Fed is trying to boost an ailing economy.
Finally, to stop the interest rate from changing it is up to you to lock in your rate. Lenders have general guidelines about when you can lock in your rate but typically you need to a subject property and a documented loan. Your loan officer won’t lock in your loan without your permission so you need to be very clear on when you’re eligible to lock. Be proactive and get regular rate updates but when you see that rates have changed from one day to the next, it’s due to mortgage bond activity.