Why Interest Rates Change Daily

  

Despite what some people believe, mortgage-backed

securities (MBS's) are the bonds that directly dictate

fixed rate mortgage interest rate pricing. The supply

and demand for MBS's is the final determiner of how

fixed rate pricing is set. Just like stocks, MBS's trade

throughout the day. Large volumes of buying or selling

can cause extreme fluctuations in the rate and point

structure of loans available to borrowers.

  

Major market participants, just like individual investors,

are constantly searching investment opportunities that

will provide the greatest return with the least amount of

acceptable risk. Investment products inherently all

possess some sort of risk. For example, one risk

associated with mortgage-backed securities, the bonds

that directly dictate fixed rate mortgage pricing, is a fear

of pre-payment. A homeowner obtains a loan for a

certain duration of time at a certain interest rate. As

interest rates fall, homeowners tend to refinance their

homes, which leads to the early payoff of the first loan

and the origination of a new loan at a lower interest

rate. Investors are cognizant of this scenario and factor

this risk into their demand for mortgage-backed

securities.

  

If the demand for MBS's is strong, the

prices of MBS's increase leading to lower mortgage

interest rates. However, if the demand for MBS's

weakens, mortgage interest rates rise. Continued gains

in the US stock market add to the competition for

investors' funds. In addition, Treasury securities also

provide competition and thus volatility.

  

Oftentimes stocks and bonds exhibit a general trading

pattern or direction. Last year, bonds steadily increased

pushing mortgage interest rates lower. Unfortunately,

the recent pattern has been an up and down motion

resulting in a general increase in mortgage interest rates.

Therefore a cautious approach to lock decisions is necessary

to protect against future volatility.