Mortgage rates, like the price of any good or service, can rise and fall based on supply, demand, and

market conditions. There are six main factors that influence mortgage rates. Lenders adjust the

cost of borrowing based on economic conditions, financial markets, and the level of risk associated

with each borrower. Because these factors are constantly changing, mortgage rates can move

daily—or even multiple times throughout the day when markets are particularly volatile.

1. Bond market yields

Mortgage rates are closely tied to the yield on long-term bonds, especially the 10-year U.S. Treasury

and mortgage-backed securities (MBS).

* The 10-Year U.S Treasury bond note (often shortened to 10 Year Treasury) Example, you give

the U.S govt $1,000, the govt pays you interest, after 10 years, the govt gives your $1,000

back. It’s a long-term bond.

* Mortgage-Backed Securities (MBS) -in short- the lender gives you a mortgage- the mortgage

is bundled together with thousands of other mortgages- that bundle is sold to investors.

In Simple Terms:

Bond yields go up → mortgage rates tend to go up.

Bond yields go down → mortgage rates tend to go down.

2. Inflation

Inflation means the cost of goods and services is increasing, which means the purchasing power of

your money is decreasing.

If inflation is expected to be high, the dollars the lender gets back in the future will be worth less

than today's dollars.

In Simple Terms:

Higher inflation → typically higher interest rates → typically higher mortgage rates

Lower inflation → typically lower interest rates → typically lower mortgage rates

3. Central Bank Policy

In the U.S., the Federal Reserve doesn't directly set mortgage rates However, changes to the

federal funds rate influence the broader economy and financial markets, which can indirectly

affect mortgage rates.

In Simple Terms:

Lower Fed Funds Rate → generally lower interest rates

Higher Fed Funds Rate → generally higher interest rates

4. Economic Conditions

* Strong economic growth can lead to higher rates because investors expect inflation and

increased borrowing.

* During economic slowdowns or recessions, rates often fall as investors seek safer assets

like government bonds.

5. Supply and demand for mortgages

In Simple Terms:

High demand: Lots of people want mortgages → lenders don't have to compete as

much → rates can be higher.

Low demand: Fewer people want mortgages → lenders compete for borrowers →

rates can be lower.

6. Credit risk

This is huge for lenders. This is often referred to as “Risk Based Pricing” Your individual

rate depends on factors such as:

Credit score

Down payment

Debt-to-income ratio

Loan amount

Loan type (fixed vs. adjustable)

Property type

Simple Terms:

Srtonger  borrower → lower risk → potentially lower rate.

Higher-risk borrower → potentially higher rate.