Why Do Rates Go Up And Down?

Interest rates react to the fundamental factors of supply and demand as well as economic forces in several areas, among them : The Federal Reserve Board's monetary policy, legislative and executive fiscal policies, business activity and inflationary expectations. Generally interest rates will be low in a sluggish economy because the demand for credit is low. On the other hand, interest rates will rise in a strong economy because demand for credit will be high.

Numerous economic indicators are closely watched by users of the financial futures markets. Below are several of the more closely watched indicators, as well as what happens when the developments are announced.

Why are mortgage rates tied so closely to economic and financial market events?

When a person borrows money from a lender, the person must sign a promissory note promising to repay the home loan and a mortgage note (or deed of trust) to serve as collateral for the loan. The bearer of these notes has a legal claim to the property until the mortgage loan is either paid in full or refinanced. When a lender has loaned out all of its available funds, the lender will often raise money by selling groups of these notes (mortgage loans) to investors. The selling of mortgage loans to investors is referred to as the 'secondary mortgage market.' In order to attract investors, this secondary mortgage market must be competitive with similar investment markets. Since a mortgage loan is a long term debt, the Treasury bond market (debt issued by the federal government) is used as a benchmark for determining appropriate value.