Far and away the biggest impact on mortgage rates is the prime lending rate. This is the rate that is set by the federal reserve and it is basically an indicator of what it costs for banks to borrow money. In many cases the banks will find it necessary to borrow from the federal reserve in order to have money to lend out. Even if they don’t need to borrow money the prime interest rate is the federal reserves way of telling the banks what they want interests rate to do. In most cases the mortgage rates will be set a couple of points above the prime rate.
It is because the prime rate is constantly changing that mortgage rates are constantly changing. If you have an adjustable rate mortgage you know that your rates will change as the prime rate changes. This is what they are talking about here. Your rate is tied to the prime rate, when it moves your mortgage rate will move by the same amount. What causes the prime rate to change is a fairly complex question and it has to do with the economy as a whole. Basically if the federal reserve thinks that the economy is growing too fast and inflation is a problem they will raise rates. If they think that the economy needs to be stimulated they will lower interest rates.
The other big factor
that goes into determining mortgage rates will be your credit. In general the better your credit the better your rate will be. The amount that the rates change based on your credit is actually surprisingly small. However even within this small amount the difference in what you pay over the course of your mortgage can be huge. Even a one point difference in the interest rate that you are paying will likely result in a difference of tens of thousands of dollars in what you end up paying.
One thing that you need to keep in mind when you are looking at mortgage rates is the difference between a fixed and a variable rate mortgage. In almost all cases you will find that the fixed mortgage will have the higher rate. This is to protect the lender in the event that rates go up. However that doesn’t mean that you shouldn’t take the mortgage with the fixed rate, in many cases this will be a better deal over the long term. The thing that you need to look at is what today’s mortgage rates are and what they are likely to do in the future. If you believe that it is likely that rates are going to rise then it actually makes sense to take the higher rate today since the rising rates will probably push the future cost up to an even higher level.