What Determines Mortgage Rates?
Most people believe mortgage rates are set by the Feds, but this isn’t necessarily accurate. However, the Fed does influence mortgage rates. Here’s how it works: The Federal Reserve sets the “discount rate” and the “funds rate”. What does this mean? Well, when commercial banks borrow money from the Fed, the “discount rate” is the interest rate they have to pay. The “funds rate” or “Fed Funds Rate” is the interest rate that banks and depository institutions charge each other. When do they borrow from each other? When banks have excess reserve funds, they charge one another for overnight loans of those funds. But, what do these rates have to do with mortgage rates? When the Federal Reserve raises or lowers its rates, the mortgage rates fluctuate in a similar pattern. The Feds also buys Treasuries or securities to lower interest rates, as they are backed by mortgages. This is often used to increase demand, as people borrow more when interest rates are lower. Changes in the Fed Funds Rate
