Go to 
Estimated reading time: 3 minutes
After watching mortgage rates hit record lows during the pandemic and then tick up, you may be wondering, “Why do mortgage rates change?” In short, a variety of factors can be at play. In this article, we’ll take a look at two major influences, the Federal Reserve — the country’s central banking system — and your mortgage’s loan type.
How does the Fed affect mortgage rates?
It may surprise you, but the Fed doesn’t set mortgage rates. Rather, 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, housing typically impacts an average of 15–18% of the country’s GDP.
A key tool the Fed uses to shape the economy is “cutting or raising rates,” which you often hear about in the news. This actually refers to the Fed adjusting a specific rate, its “federal funds rate,” which has a major influence on other interest rates.
That’s because this is the rate banks use to borrow money from each other overnight. From there, it can influence the economy as banks pass their rising or falling costs on to businesses and consumers who take out loans.
Rates Are Changing Daily.
Lock in yours today.
When the economy is sluggish — like it was 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 homebuyers taking out more mortgages. In contrast, in a good economy or when inflation is on the rise, the Fed may hike rates instead.
Exactly how the federal funds rate affects mortgage rates is a little harder to describe, but it boils down to its ripple effects across the economy. As a result, mortgage rates and the federal funds rate tend to follow each other up or down.
How can your loan affect the mortgage rate you get?
Now let’s look at how your loan choices can affect you personally. Borrowers generally have several loan options to choose from. The final interest rate you lock in can depend on factors like your loan term and down payment, and whether your loan will have a fixed or adjustable rate. That said:
- Shorter loan terms usually have lower mortgage rates. As an example, a 15-year fixed-rate mortgage typically has a lower interest rate than a 30-year fixed-rate loan. And as the name suggests, “fixed rate” mortgages have interest rates that never change over the life of a loan. This can be appealing if you want a predictable mortgage payment.
- Adjustable-rate mortgages (ARMs), on the other hand, have interest rates that can change or “adjust” over time. These loans generally start with a lower interest rate than fixed-rate mortgages, but that rate can go up over time (a risk). Additionally, ARMs can be more directly affected by changes to the federal funds rate. So, as you see the Fed make changes, an ARM is more likely to reflect its ups and downs.
At the end of the day, everyone’s situation and mortgage needs are different. If you’re ready to explore your options to refinance or buy a home, Mr. Cooper can help. Call one of our mortgage pros today at 833-702-2511 or get started online!
