Why Do Mortgage Rates Change All the Time?

A Home Buying Article Contributed by Robert Scalia

Why Do Mortgage Rates Change?

Ask this very question to a financial or mortgage rate advisor and he might very well believe you are a young child asking his mother: Why is the sky blue.

The reality of the matter is that mortgage rates change with interest rates, and that there are many interest rates out there can affect the mortgage rate - from prime rates to treasury bill rates.

Knowing what causes these different rates to rise or fall is crucial to understanding the mortgage market.

What are the Different Rates and How Will They Affect the Mortgage Rate?

Here are a couple of rates you should know about when trying to get a handle on fluctuating mortgage rates:

The prime rate is the rate that is offered to a bank's best customers.

Treasury bill rates are short-term debt instruments used by the U.S. Government to help finance their own debts. These come in denominations of 3 months, 6 months and 1 year.

Treasury Notes are other instruments used by the U.S. Government to finance their debt. These are usually long-term: years, 5 years and 10 years. Treasury Bonds are the longest of these debt instruments. They usually come in 30-year denominations.

The Federal Funds Rate is the rate banks charge each other for overnight loans. Federal Discount Rates, on the other hand, are the rates the New York Fed charges to its own member banks.

These are just a couple of the many different interest rates that can go a long way in determining current mortgage rates.

Now That I Know What These Various Rates are, How to I Use Them to My Advantage When It Comes to Getting the Best Mortgage Rate out There.

All you have to remember when it comes to mortgage rates is that interest-rate movements are based on the simple concept of supply and demand.

If the demand for credit loans increases, so will interest rates. The concept is simple: Because there are more buyers, sellers can ask for a better price. If, on the other hand, demand for credit reduces, then interest rates will fall as well.

There are a couple of very general assumptions you should therefore keep in mind:

Bad news in the form of a slowing economy is actually good news for your interest rates. The opposite will undoubtedly hold true.

And don't count out inflation. Because higher inflation is associated with a growing economy, the Federal Reserve will usually increases interest rates to slow the economy down and reduce inflation. That's why a strong economy usually results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

And for the most part, mortgage rates tend to move in the same direction as interest rates. Again, this isn't always the case.

Mortgage rates are also based on their own supply and demand. This might explain why mortgage rates will sometimes rise as interest rates fall. If possible, you want to make sure you're not looking to buy a house when everyone else in your town or country is thinking of doing the same.