Lately, historically low mortgage rates have been making the news once again. What causes rates to fluctuate?

One main component is supply and demand. This controls the interest rate of mortgages on a fundamental level. When many people are seeking mortgages to buy homes. When there are a lot of buyers seeking mortgages, lenders can charge higher interest rates. When there are fewer buyers, lenders reduce interest rates to attract borrowers. Supply and demand keep mortgage interest rates in a constant state of flux.

The effect that government bonds have on mortgage rates is a little more complicated. Basically, investment firms make profit from mortgages by selling a stake (known as securities) to investors who will profit from homeowners paying interest each month. Government bonds are very similar and therefore the performance the bond market can drive investors away from, or toward, the mortgage security market. This changes how much money is available for mortgage lending and the rates that mortgage lenders charge.

The Federal Reserve Board can also change certain key interest rates as a way of controlling economic growth. When the Fed raises the prime rate, often to curb inflation and slow the growth of the economy, mortgage rates rise as a result. On the other hand, when the Fed slashes interest rates to stimulate growth, mortgage rates have a tendency to drop, making them more affordable to home buyers.

Other things that affect interest rates on an individual level are credit worthiness and the loan term (15 year vs 30 year).