What Moves Mortgage Rates? - What makes them rise? What makes them fall? Is it the Fed? The Economy? Inflation? Banks? The President? Fannie Mae? Freddie Mac?

The answer is sometimes complex, but rates are moved by a number of related factors, and believe it or not you are one of those factors!

As interest rates (yields) decline, investment customers can become more or less interested, depending on the direction of economic growth, inflation, appetite for the product and several other factors. Typically, though, the lower those rates get, fewer investors are interested in putting them on their books.

Of course, it's not always as easy or simple as that. Mortgage market makers serve not one client, but two. They serve the folks who want the highest possible return on their investments and the homeowner / homebuyer who wants the lowest possible interest rate. Simultaneously, rates need to be high enough to attract investors and low enough to attract borrowers. Confused? It can be a complex and confusing dance to understand.

In order to attract investors, sellers of bonds must compete with one another to get their money. They do this by offering a variety of instruments (also called products) with differing structures of risk and return over given periods of time. These offerings compete with other investments which are similar in performance, such as US Treasuries, corporate bonds, foreign bonds, and others.

Investor demand for a given kind of investment plays a considerable role in moving market yields, because investors literally have hundreds of places to put their money. It's a crowded marketplace with many sellers of various products competing for those investor dollars. Investor demand for specific product rises and falls with changes in investment strategies. If demand falls enough a change must be made to attract investors again. How to attract them again you say? The answer usually comes as a raise in interest rates.

The Federal Reserve Board known as the FED in the industry actually controls interest rate movements to control the economy and inflation. Before 1913 when the FED was created the markets were actually very unstable. They play a crutial role in the economy. If rates are left low for too long then inflation can run out of control so the FED raises rates to counteract this from happening.

Mortgage money can come from many sources, including deposits at banks and brokerages, but most comes from investors through what is collectively known as the "Capital Markets". This is where investors interested in purchasing certain kinds of debt instruments -- bonds, in this case -- come to buy those items.

Who are these investors, and why are they so fickle? Mostly, they are people like you and I. They want two opposing things; low payments on your debt, especially your mortgage, and high returns on your investments. You (the investor) will only buy so many low-yielding bonds (mortgage or otherwise) because you will take you money elsewhere if the returns are too low.

Bond prices and bond yields always move in opposit directions. When economic indicators, such as the gross domestic product and unemployment rate, forecast a strong economy, long term interest rates move up. When these indicators predict a slower economic growth, long term interest rates usually decrease. Mortgage rates and long term rates often move in tandum.

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