Interest Rates Move Every Day. But Why?

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Many brokers are asked how mortgage interest rates are determined. Orion’s brokers understand that mortgage rates have remained within a similar range for the past few years, even when it feels like they should be declining. At a high level, mortgage rates are driven by supply and demand. When bond prices rise, interest rates fall, and when prices fall, rates increase. The question then becomes what influences that supply and demand.

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How Supply and Demand Drive Mortgage Rates

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On the supply side, rates are influenced by the volume of mortgage originations in the market. Demand is driven by investor expectations about future economic conditions. If investors expect inflation, they require a higher rate of return, which reduces demand and pushes rates higher. Lenders like Orion typically do not hold mortgages long term. Instead, loans are bundled into pools and sold to Fannie Mae, Freddie Mac, or Ginnie Mae. This process allows lenders to replenish capital and continue funding new loans.

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Inflation, Risk, and Investor Behavior

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Investor demand for fixed income assets is heavily influenced by inflation expectations and risk. Riskier assets must offer higher returns to attract investors. A borrower with stronger credit represents lower risk and may receive better pricing. During the COVID pandemic, the Federal Reserve increased demand by purchasing large volumes of mortgage backed securities through quantitative easing. This policy helped keep rates low and supported the housing market. As the economy recovered, expectations around inflation and reduced Fed participation shifted demand, contributing to higher rates.

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What This Means for Brokers and Borrowers

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Mortgage rates are ultimately shaped by investor expectations, economic outlook, and supply and demand dynamics. While these factors set the foundation for rates, individual loan pricing can vary. Brokers are encouraged to speak with their Orion AE to better understand rate movement and explore programs designed to offer competitive pricing for their borrowers.

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