Factors That May Affect Mortgage Interest Rates

There's more to the cost of owning a home than the price the seller is asking for. The interest rate on your mortgage will affect the price and how much you'll pay every month.

Comparing mortgage interest rates is important because they may change daily, and different rates may be associated with different types of loans. With variable-rate or adjustable-rate mortgages, it is understood from the outset that the loan's interest rate will change over time, becoming higher or lower depending on the current economic climate.

Here is why mortgage interest rates fluctuate so frequently.

The Federal Reserve and Interest Rates

The Federal Reserve System ("The Fed"), although considered our country's central banking system, is independent of the federal government. In essence, the Fed controls the movement of money throughout the U.S. financial system.

Mortgage Investors and Changing Interest Rates

The Federal Reserve is not the only player affecting changing mortgage rates. To create more money to lend, banks often sell their loans on the secondary market, now controlled by the federal government. Banks and other mortgage lenders sell mortgage-backed securities to investors. The return on investment for these investors is generated by interest paid by mortgage holders on their loans. For the investors to realize a return, banks must charge a higher interest rate.

The Effect of Changing Mortgage Interest Rates on Loans

Though they are locked-in once the application process is completed, fixed-rate mortgage rates are constantly changing. Interest rates for variable-rate loans fluctuate as well, and continue to change throughout the term of the loan. Another impact on interest rates occurs when lower interest rates attract homeowners wishing to refinance their mortgages.