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Change?
Why Do Mortgage Rates Change?
Have
you ever called a mortgage company and received a
quote and then called back the next day and the same
rate was no longer available? Mortgage companies and
borrowers are subject to potential daily and even
hourly shifts in the market. Interest rates fluctuate
on the simple principal of supply and demand. If there
is high demand for credit, in this case loans, then
rates typically rise. When you stop and think about
it, this makes sense. If there are more people looking
for credit, the sellers of that credit can demand
a higher price. Of course, the opposite is also true.
When there is less demand for credit, sellers are
forced to be more competitive and buyers can get a
better deal. So when the economy is growing, companies
are looking to grow with it and they are seeking credit
to expand their businesses. Thus, there is more competition
and rates tend to rise. Other the other hand, when
the market slides south, there is less demand for
credit and rates tend to fall.
There are other important variables that may not
appear immediately but none the less do affect rates.
These could be things such as inflation (including
the impact of oil prices and the war in Iraq), short
term interest rates (these can be determined by the
“Fed” as well as other factors), and bond
prices and bond rates that impact mortgage rates.
Additional Mortgage Rate and Index Information :
To help us understand why mortgage rates change,
it is important to realize that there is not one interest
rate, but multiple ones. Below are some of the most
prevalent interest rates and indexes:
Prime rate - This rate is often offered to
a bank’s best customers. If you are shopping
for a home equity line of credit, then it is important
to familiarize yourself with the prime rate. HELOCs
are typically based upon the prime rate -plus or minus
a certain percentage.
LIBOR - Stands for London Inter-bank Offered
Rates. Libor rates are based upon the rates that of
a select group of London Banks offer each other for
inter-bank deposits. Many adjustable rate mortgage
programs use the Libor index.
Treasury bill rates ''T-bills'' and Treasury
Notes - These are short-term and intermediate debt
instruments used by the Government to finance their
debt. The treasury index is based upon the auctions
of U.S. government Treasury bills or on the Treasury’s
yield curve. Like the LIBOR index, the U.S. Treasury
index is a popular index for adjustable rate mortgage
products. Also, the Twelve Month Treasury Average
(12 Month MTA) is a popular index which is based upon
the twelve month average of the monthly yields of
U.S. Treasury securities (maturing in one year). The
MTA is a popular choice for option arm mortgage programs.
Treasury Bonds - Unlike T-bills and Treasury
Notes, treasury bonds are long-debt instruments. These
bonds are used by the U.S. Government to finance its
debt.
Cost of Savings Index - often referred to
as the COSI index. This index is based upon the annual
average of interest rates on World Savings deposit
accounts. The average is pulled on the last day of
each month.
11th District Cost of Funds - Often referred
to as the COFI index - The COFI index is based upon
the average of the borrowing cost to member banks
of the Home Loan Bank of San Francisco of the 11th
District. Unless you are shopping for an option arm
mortgage, it is unlikely that your loan will be affected
by this rate.
Certificates of Deposit Index - Often referred
to as the CODI index - this index is arrived at by
calculating the average of the past twelve months
rates of 3 month CD rates.
Federal Funds Rate - The fed funds target
rate is the rate which federally chartered banking
institutions lend balances to other depository banks
overnight.
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