What Causes Mortgage Rates to Fluctuate?
When mortgage rates fluctuate, some believe that it is a simple matter of Federal Reserve decisions or “supply and demand,” but they are actually influenced by a variety of factors.
Changes in various rates and indexes are among the major causes of mortgage rate fluctuations. Two examples are the COFI and LIBOR. The COFI, or Cost of Funds Index. is a measure of how much interest banks have to pay on sources of money (such as savings accounts or CDs) they use for mortgage funding, according to fhlbsf.com (FHLBank San Francisco). As is to be expected, the banks will increase rates if it is costing them more to provide the money which is being loaned. As indicated by wikipedia.org, the LIBOR, or London InterBank Offered Rate. reflects the interest rate on money loaned among different banks. This also causes changes in how high mortgage rates are set, although it is not as direct. Federal Reserve decisions can cause these rates to fluctuate, but other factors take a larger role in rate changes on this type of loan.
Various economic factors can cause mortgage rate levels to fluctuate as well. An
increase in foreclosures on homes is one of the causes of rising rates on mortgages, as banks feel they need to charge more interest to make up for losses brought about by foreclosures, and to counteract future foreclosures. Causes of foreclosures can be attributed to increasing unemployment, rising prices, or any number of other problems which bring about economic difficulties. When rates decrease, it sometimes causes more new mortgages to be created, as well as additional purchases on credit by people with adjustable mortgages (who have more money to spend); this can potentially result in additional rate reductions. To expand upon the issue of the above-mentioned Cost of Funds Index, the ways people keep their money in banks can be behind interest rate changes as well; if fewer people put their money in savings accounts, which generally pay little interest, and place more money in higher-paying Certificates of Deposit, mortgage rates may increase because of the higher interest cost being paid to account holders.
Overall, it is not possible to specify any one or two factors which make mortgage rates fluctuate, rather it is a combination of many direct and indirect economic factors and indexes which they influence.