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Why Do Mortgage Rates Change?

You may have heard that mortgage rates hit multiple record lows during the pandemic, but also know these rates can always go up or down. This may have you wondering, “Why do mortgage rates change?” The Federal Reserve—the country’s central banking system—and your mortgage’s loan type can both play a role.

How the Fed affects the mortgage rate environment

The Fed doesn’t set home loan rates, but it can do things to influence them. That’s because the Fed’s job is to keep the economy stable, and housing plays a big part in that. According to the National Association of Homebuilders, it typically impacts an average of 15–18% of the GDP.

One tool the Fed uses to shape the economy is cutting interest rates, which you often hear about in the news. This actually refers to the Fed cutting its federal funds rate,” which has a major influence on other interest rates. When the economy is sluggish, like during the pandemic, the Fed may cut the federal funds rate to encourage interest rates for new loans to go down. This can spark economic activity like more home loans. In a good economy, the Fed may hike rates instead.

Exactly how the Fed affects mortgage rates is a little harder to describe. But, as NerdWallet explains, mortgage rates and the federal funds rate tend to follow each other.

How your loan affects the mortgage rate you get

Another factor that can change your mortgage rate? The type of loan you choose. Borrowers generally have several options, from a 30- or 15-year fixed-rate mortgage, to an adjustable-rate mortgage, and more.

As the name suggests, “fixed rate” mortgages have interest rates that never change over the life of your loan. The actual interest rate you lock in, however, depends on factors like your loan term and down payment. Shorter loan terms usually have lower rates, for example.

In contrast, adjustable-rate mortgages (ARMs) have interest rates that can change. They generally start with a lower interest rate than fixed-rate mortgages. After a set amount of time called an “introductory period,” that initial interest rate may go up (a risk) or stay the same. Keep in mind that rates can change depending on a variety of factors, including the specific terms of your ARM.

Ready to change your mortgage rate or buy a new home with all this in mind? Click here to learn more about your options with Mr. Cooper.