WHAT AFFECTS MORTGAGE RATES?

If you�ve been shopping around for a mortgage or thinking of refinancing and checking out mortgage rates, you�ve probably discovered that rate quotes from one mortgage company to the next are remarkably similar. You can also tell when mortgage rates change from one day to the next. Mortgage rates can change on a daily basis and can even change during the course of a business day. But you may ask, �Why?� Why do mortgage rates change and why do mortgage companies seem to change their rates all at the same time?

In short, because mortgage rates are all tied to the very same index. When that index makes perceptible changes, so too will rates move. For example, consider the common 30 year fixed rate loan. Each morning and throughout the day, lenders follow a mortgage bond labeled FNMA-30yr 3.50. Indeed, the index is a bond that is bought and sold just as any other bond. The correlation between stocks and bonds also stands with this index.

When investors feel confident in the economy and believe stocks will improve they buy more stocks, hold them for the long term or sell for a quick profit. On the other hand, if investors believe the economy is on shaky ground and investing in stocks isn�t a very prudent move, investors can park their cash in a bank account or they can invest in bonds, including mortgage bonds. Bonds provide a guaranteed return to the investor. The buyer knows how much profit will be made and when. This safety net is offset by the yield bonds provide. Bonds don�t have the upside that a stock might have yet a stock doesn�t provide a guaranteed return, either.

When investors think the economy is on the wrong track they can buy mortgage bonds. This demand for bonds will increase the price of a particular bond and when the price goes up, the profit � or yield- moves down. The more uncertainty in the economy, the greater the demand for bonds which pushes down rates.

The Federal Reserve certainly has a say as it relates to rates but only indirectly. When the Fed raises or lowers the Federal Funds rate, it gives the markets an indication of what the Fed thinks about the economy. If the Fed raises, the thinking is the economy is getting better soon and investors then sell their bonds and buy stocks. And the other way around. So when you get mortgage rate quotes and they�re different than the day before, it�s due to investors buying or selling mortgage bonds based upon their expectations.

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