What Causes Interest Rates to Go Up and Down?

Question #39 from HOW TO GET A MORTGAGE DURING & AFTER THE SUBPRIME CRISIS

Many, many economic factors! Strength and weakness of the dollar, the price of oil, how the Federal Reserve feels on any particular day, and much, much more.

The Real Deal: Many clients, especially on a refinance, want to wait until the Federal Reserve Board lowers interest rates next week to lock in an interest rate. Sounds good, but it's completely ineffective. The Fed determines two key indices: the Fed Funds Rate, which is an interest rate at which banks lend money to each other; and the Fed Discount Rate, a rate for lending to commercial banks. Neither of those indices directly affect interest rates of fixed or adjustable rate mortgages. However, the Fed's rate changes will affect your HELOC if your HELOC interest rate uses the prime rate as its index.

If you really want to know what mortgage interest rates are tied to, take a look at the 10-year Treasury note. There is not a direct correlation between the two, but most of the time as the 10-year Treasury note moves up and down, so do mortgage interest rates. So maybe the real question is what makes the price of the 10-year Treasury note go up and down? Although the answer may be complicated, as with most other items for sale, supply and demand determine price and rule the day. The greater the demand for the 10-year treasury, the higher the price-which means it's a good bet that mortgage interest rates will rise.

The Bottom Line: The Fed's concerns are about jillions of economic factors, not directly the interest rate for home mortgages. If the Fed slashes interest rates, don't expect a corresponding slash when you want to lock in your mortgage interest rate.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.