Have you ever called a mortgage company and received a quote and then called back the next day and the same rate was no longer available? Mortgage companies and borrowers are subject to potential daily and even hourly shifts in the market. Interest rates fluctuate on the simple principal of supply and demand. If there is high demand for credit, in this case loans, then rates typically rise. When you stop and think about it, this makes sense. If there are more people looking for credit, the sellers of that credit can demand a higher price. Of course, the opposite is also true. When there is less demand for credit, sellers are forced to be more competitive and buyers can get a better deal. So when the economy is growing, companies are looking to grow with it and they are seeking credit to expand their businesses. Thus, there is more competition and rates tend to rise. Other the other hand, when the market slides south, there is less demand for credit and rates tend to fall.

There are other important variables that may not appear immediately but none the less do affect rates. These could be things such as inflation (including the impact of oil prices and the war in Iraq), short term interest rates (these can be determined by the “Fed” as well as other factors), and bond prices and bond rates that impact mortgage rates.

Additional Mortgage Rate and Index Information

To help us understand why mortgage rates change, it is important to realize that there is not one interest rate, but multiple ones. Below are some of the most prevalent interest rates and indexes:

Prime rate - This rate is often offered to a bank’s best customers. If you are shopping for a home equity line of credit, then it is important to familiarize yourself with the prime rate. HELOCs are typically based upon the prime rate -plus or minus a certain percentage.

LIBOR - Stands for London Inter-bank Offered Rates. Libor rates are based upon the rates that of a select group of London Banks offer each other for inter-bank deposits. Many adjustable rate mortgage programs use the Libor index.

Treasury bill rates “T-bills” and Treasury Notes - These are short-term and intermediate debt instruments used by the Government to finance their debt. The treasury index is based upon the auctions of U.S. government Treasury bills or on the Treasury’s yield curve. Like the LIBOR index, the U.S. Treasury index is a popular index for adjustable rate mortgage products. Also, the Twelve Month Treasury Average (12 Month MTA) is a popular index which is based upon the twelve month average of the monthly yields of U.S. Treasury securities (maturing in one year). The MTA is a popular choice for option arm mortgage programs.

Treasury Bonds - Unlike T-bills and Treasury Notes, treasury bonds are long-debt instruments. These bonds are used by the U.S. Government to finance its debt.

Cost of Savings Index - often referred to as the COSI index. This index is based upon the annual average of interest rates on World Savings deposit accounts. The average is pulled on the last day of each month.

11th District Cost of Funds - Often referred to as the COFI index - The COFI index is based upon the average of the borrowing cost to member banks of the Home Loan Bank of San Francisco of the 11th District. Unless you are shopping for an option arm mortgage, it is unlikely that your loan will be affected by this rate.

Certificates of Deposit Index - Often referred to as the CODI index - this index is arrived at by calculating the average of the past twelve months rates of 3 month CD rates.

Federal Funds Rate - The fed funds target rate is the rate which federally chartered banking institutions lend balances to other depository banks overnight.

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Additional Mortgage Rate and Index Information