By now we’ve covered what mortgage rates are, how they’re priced, and why the rate itself is only one part of the quote. So, now you might be wondering: why do mortgage rates keep changing? And I don’t blame you one bit.
Sometimes they change from one day to the next. Sometimes they can change more than once in the same day. And sometimes people say “rates went up” even though the actual interest rate being quoted didn’t change at all—the cost attached to that rate did.
None of that is random. The simple version is that mortgage rates change because the financial market behind them changes.
Mortgages are investments, too
When you get a mortgage, that loan doesn’t necessarily stay with the lender that originally gave it to you forever. A lot of mortgages are eventually bundled together with other similar loans and sold to investors as mortgage-backed securities, or MBS.
The easiest way to think about that is this: to you, the mortgage is debt. To an investor, it’s an investment they expect to earn money from over time.
So when we talk about mortgage rates moving because of “the market,” this is a big part of what we mean. Investors are constantly deciding what those mortgages are worth to them and how much return they need in order to make buying them worthwhile. If investors are willing to pay more for mortgages, mortgage pricing can improve. If they’re willing to pay less—or they want a higher return—pricing can get worse.
Eventually, that movement makes its way down to the rates and costs being offered to borrowers.
So what makes investors change their minds?
A whole bunch of things happening in the economy.
Inflation is a big one. If investors think inflation is going to stay high, they generally want a better return on their money. Jobs reports* can matter. Economic growth reports can matter. Consumer spending reports can matter. Government spending and borrowing reports can matter.
Basically, investors are constantly trying to figure out what the economy is doing and, more importantly, what it’s probably going to do next. And that second part is where things start getting a little weird.
Let’s say an inflation report comes out and inflation improved. You might reasonably think, “Great. Rates should improve.”
Maybe.
If investors expected inflation to improve even more than it actually did, the market can still react negatively. That’s why you can see economic news that sounds good and then watch mortgage rates move the wrong way.
The market isn’t only reacting to whether something was good or bad. It’s reacting to whether it was better or worse than expected.
And then there’s the Fed...
This one causes a LOT of confusion (and me a headache).
The Federal Reserve does not directly set mortgage rates. When you hear that “the Fed raised rates” or “the Fed cut rates,” they’re talking about the federal funds rate, which is a short-term interest rate used inside the banking system. That is not the same thing as your 30-year mortgage rate.
Now, can what the Fed does affect mortgage rates? Absolutely. The problem is that people tend to expect the math to work like this: the Fed cuts rates by .25%, so mortgage rates should also drop by .25%.
Nope.
Mortgage rates are reacting to what investors think about inflation, the economy, and future interest rates. So sometimes the Fed cuts rates and mortgage rates go down. Sometimes the Fed cuts rates and mortgage rates go up.
Which sounds completely backwards until you understand that the market may have already expected the cut, expected a bigger cut, or heard something in the Fed’s comments that changed what investors think is coming next.
So yes, the Fed matters. It just does not control your mortgage rate the way people often think it does.
Then lenders add their own pricing on top
Even if the overall mortgage market moves, that doesn’t mean every lender is going to offer the exact same thing. Lenders have their own costs, margins, staffing, investors, and amount of business coming through the door.
If a lender wants more loans, it may lower its pricing a little to bring more business in. If it is absolutely slammed and struggling to keep up with the loans it already has, it may not need to be the cheapest lender on the block that day.
That means two lenders can be looking at the same overall market and still offer different pricing. They’re dealing with the same general market conditions, but they’re still two different businesses making their own pricing decisions inside those conditions.
Why can rates change more than once in one day?
Because the market itself can, and does, move throughout the day.
A lender may put out pricing in the morning, and then a few hours later something changes enough that the pricing they started with no longer makes sense. So they update it. In the mortgage world, we call that a reprice.
Sometimes that reprice is better. Sometimes it ain’t.
And this is where the whole “same rate, different price” conversation comes back around. Maybe 6.50% was available this morning with no additional cost. By this afternoon, 6.50% is still available, but now it costs .500 points.
The interest rate didn’t change.
The deal did.
That still means mortgage pricing got worse.
Which is why timing matters when you compare lenders
Let’s say one lender gave you a quote Tuesday morning and another gave you a quote Wednesday afternoon. If the market moved between those two quotes, you may not actually be comparing which lender has the better deal. You may just be comparing Tuesday’s market to Wednesday’s market.
That’s why I want lender comparisons to be as close to apples-to-apples as possible: same loan scenario, same basic assumptions, and quotes from roughly the same point in time. THEN we can see what we’re really working with.
*A “jobs report” is a regular snapshot of the labor market—how many people are working, whether employers are adding jobs, what wages are doing, and how many people are unemployed.