Why do mortgage rates fluctuate?

Trying to predict the movement of home mortgage rates is tough, even for seasoned professionals. A changing economy is one of the biggest causes, as is the government’s monetary policy at a any given time. But at the center of it all is one primary driving force: Supply and demand.

Five factors that affect mortgage rates

Certainly, the financial health of individual borrowers affects the specific interest rate they will be offered on a loan. But global events, economic factors, and government monetary policy affect the whole mortgage rate universe.

There are five major factors at play here, and all of them reflect the fundamental rules of supply and demand. Some of these elements are complex, but a basic understanding of the underlying concepts will help explain the interest rates you are paying now and what to expect in the future.

01. Inflation

The upward movement of consumer prices due to inflation is a reflection of the overall economy, and a critical factor for mortgage lenders. Inflation erodes the purchasing power of dollars over time.

To make a net profit, mortgage lenders have to maintain interest rates at a level that is at least sufficient to overcome this erosion. Consequently, inflation generally leads to higher mortgage rates.

02. The rate of economic growth

Economic growth indicators, such as gross domestic product (GDP) and the employment rate, influence mortgage rates. Strong economic growth leads to higher wages and greater consumer spending, including consumers seeking mortgage loans for home purchases.

All that growth is good for a country’s economy, but the increase in demand for housing tends to propel mortgage rates higher. Why? Supply and demand — Lenders only have so much capital to loan.

03. Federal Reserve monetary policy

The Federal Reserve Bank does not set specific interest rates in the mortgage market. However, its actions in establishing the Federal Funds Rate — and adjusting the money supply upward or downward — have a significant impact on the interest rates available to the borrowing public.

In general, a monetary policy that increases the money supply puts downward pressure on mortgage rates, while tightening the money supply pushes rates upward.

Mortgage rates and Treasury bonds

The 10-year Treasury bond price, which is a big indicator of mortgage rates, is inversely related to how the economy is doing. In the simplest terms, when the bond price increases, mortgage rates decrease. When the bond price decreases, rates increase.

For example, if the economy is doing well, investors typically prefer “riskier” equity investments (stocks), instead of “safer” debt investments (bonds). Due to the reduced demand, the 10-year Treasury bond value goes down because it’s perceived as the safest investment.

As the bond price declines, its yield will increase — because its rate of return remains the same, but it costs less to buy — and mortgage rates will rise.

Conversely, when the economy nose-dives, investors get nervous and demand for the 10-year Treasury bond increases (it’s safer). The increased demand drives up the bond price (for the same rate of return), so the yield decreases, and mortgage rates go down.

In short, when demand for “safer” debt securities (bonds and mortgages) increases, the supply decreases, so prices increase, and the yield decreases. Since the mortgage market is closely tied to bond yields, this drives mortgage rates down.

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04. The bond market

Banks and investment firms sell mortgage-backed securities (MBS) as investment products. The yields available (what you earn) from these debt securities must be sufficiently high to attract buyers that might otherwise purchase more secure government bonds and corporate bonds. The money you can earn on these competing investment products affects the MBS yields that financial institutions can offer.

One frequently used government bond benchmark to which mortgage lenders often fix their interest rates is the 10-year Treasury bond yield (see box). Typically, MBS sellers must offer higher yields because repayment is not 100% guaranteed as it is with government bonds. The higher yields required to stay competitive demand packaging mortgages that have higher interest rates.

05. Housing market conditions

Trends and conditions in the housing market also affect mortgage rates. When fewer homes are being built or offered for resale, the decline in home purchasing leads to a decline in the demand for mortgages and pushes interest rates downward.

Another trend that can also apply downward pressure to rates is an increasing number of consumers opting to rent rather than buy a home. Such changes in the availability of homes and consumer demand affect the levels at which mortgage lenders set loan rates.


Trying to explain the movement of interest rates — in any financial sector — is dodgy at best. There are so many variables, that predicting change is almost impossible. Although none of the above factors operate alone, if we stick to our original premise regarding supply and demand, the fluctuations become a bit easier to understand.

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Navigating interest rates and mortgage types can get confusing. If you’d like to speak with some smart folks who can clear away the jargon and explain your options in simple terms, you’ve come to the right place.

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Last updated: October 11, 2023 at 1:23:52 PM PDT

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About Kristen Wilson

Kristen Wilson is a licensed loan officer and owner at Network Mortgage in Chico, California. She has been helping clients with mortgage financing for over 25 years.

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