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Conforming Mortgage Rates and How it Affects the Economy

Conforming mortgage rates fluctuate, sometimes within a year, sometimes throughout several years. Mortgage interest rates depend on the time of year and indeed the year itself.. Many consumers have wonder why this is so. What factors affect the mortgage rates?

Federal Reserve Affect on Mortgage Rates

The Federal Reserve can only control the Discount Rate and the Fed Funds Rate. This is very different from conforming mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another. A cut or increase by the Fed in interest rates only affect conventional mortgage rates that are tied to short-term interest rates, such as home equity lines of credit (HELOCs) and adjustable rate mortgages (ARMs) because those rates are tied to the Prime Rate. But, none of this actually affects the long-term, fixed mortgage rates.

What Really Does Affect Mortgage Interest Rates

Mortgage interest rates are actually based on mortgage backed securities (MBS) or bonds. If the bonds sell high, mortgage interest rates go down. If bonds sell low, mortgage interest rates go up. The performance of these bonds on the trading floor is what affects whether conforming mortgage rates go up or down.

Economic Factors that Affect MBS Performance

Economic factors that affect the performance of mortgage backed securities include disparate economic reports on stock and bond behavior in the stock market, the amount of buyers to sellers that affects the movement of money in and out of the stock market, unemployment percentages, inflation fears, and to a lesser extent, economic data that reflect the strength of the economy in reporting GDP, CPI, PPI, and so on.

When the economy is good, the property market is up and more people are borrowing money. The interest rate is raised, and this increase is reflected in people's home loan. When the market is at a low, property market is down, and fewer people borrow money. In response to this, the interest rate is lowered to increase demand, which lowers the borrowing rate in general.