The Reason Mortgage Rates Change

Last week, the average 30-year mortgage interest rate dropped by 0.06%. This lead to home loan refinancing applications to jump 20% from its prior week. This goes to show how even a small change in interest rate can be enough for people to take action. While the rates may have been down last week, they have slightly climbed this week. This goes to show that mortgage rates are always changing.

You may be wondering why mortgage interest rates change daily or even multiple times a day. Lenders will change the rate based off of what is occuring in the economy and market. Inflation, demand for real estate, the Federal Reserve and the bond market are a few factors that affect rates. 

According to research by Freddie Mac, the average 30-year mortgage interest rate was 7.16% in June 2001 and 2.98% in June 2021. Why has it gone down so much? Jean Folger from Investopedia explains that interest rates and inflation tend to be inversely correlated. Central banks manipulate short-term interest rates to affect the rate of inflation in the economy.

“In general, as interest rates are reduced, more people are able to borrow more money. The result is that consumers have more money to spend. This causes the economy to grow and inflation to increase” says Folger.

Folger continues. “The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save because returns from savings are higher. With less disposable income being spent, the economy slows and inflation decreases”

You can see how much inflation has risen by looking at the CPI. The CPI measures the change over time of the average cost of common consumer goods and services, therefore directly measuring inflation. The average CPI in July 2001 was 177.1, and the average CPI in 2021 is 263.7. This means that the cost of living in 2021 is about 1.49 times higher than it was in 2001. As inflation has increased over time, mortgage rates have gone down.