Keri Shepherd - Your Home Loan Professional
Keri Shepherd
Branch Manager
NMLS #350844
Direct: 808-739-7807
Mobile: 808-223-4118
Fax: 877-281-5901
4211 Waialae Ave., Suite 107
Honolulu, HI 96816
Branch NMLS #389672
I am licensed to originate mortgage loans in the following state(s): HI
Watch this 2 minute video to learn more about the loan process

Learning Center

Why Rates Change

We are committed to keeping clients informed about timely topics and trends in the mortgage industry. One common mortgage industry misconception is the correlation between the Federal Reserve Board's announcements to raise or lower interest rates and the direct effect on fixed mortgage rates. While the two are connected, they don't always go hand-in-hand.

Kinds of Rates

To better understand why mortgage rates change, we must first look at why interest rates change. First, it is important to realize that there is not just one interest rate, but many:

Prime Rate: The rate offered to a bank's best customers and subject to change monthly.

Treasury Bill Rates: Treasury Bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly know as T-Bills, they come in denominations of 3 months, 6 months and 1 year. Each Treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).

Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.

Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt.

Federal Funds Rate: Rates that banks charge each other for overnight loans.

Federal Discount Rate: Rate that the Federal Reserve charges to member banks.

LIBOR: London Interbank Offered Rates. Average London Eurodollar rates.

6-month CD Rate: The average rate that you get when you invest in a 6-month Certificate of Deposit.

11th District Cost of Funds: Rate determined by averaging a composite of depository rates at Savings & Loan institutions in the Western United States.

Fannie Mae-Backed Security Rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities strongly influence mortgage rates.

Ginnie Mae-Backed Security Rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.

Mortgage Rates Refresher

Fixed interest-rate fluctuations are based on the concept of supply and demand. If demand for credit (loans) increases, so do interest rates. More buyers mean sellers can command a better price (i.e., higher rates). If demand for credit reduces, then so do interest rates. This is because there are more sellers, so buyers can command a lower better price (i.e., lower rates). When the economy expands, there is higher demand for credit, so rates increase. When the economy slows, the demand for credit decreases and so do rates.

Effects of Inflation

A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflationary risk. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher mortgage rates.

Mortgage Rates vs. Interest Rates

Fixed mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This may result in mortgage rates moving somewhat differently from other rates.

Significance of Bond Prices

There is an inverse relationship between bond prices and bond yields. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity--typically $1000. If the price of the bond is currently $900 with 10 years left until maturity, and interest rates start moving higher, the price of the bond starts dropping. The higher interest rates accumulate over the next five years, meaning that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Effect of Economic Data on Rates

Number of arrows indicates potential effect on interest rates.

1 arrow=least effect, 5 arrows=maximum effect

Economic Event

Effect on
Interest Rates

Significance of event

Consumer Price Index (CPI) Rises

Indicates rising inflation.

Dollar Rises

Imports cost less; indicates falling inflation.

Durable Goods Orders Increase

Indicates expanding economy

Gross National Product Increases

Indicates strong economy

Industrial Production Rises

Indicates strong economy

Business Inventories Rise

Indicates weak economy

Leading Indicators (LEI) Increase

Indicates strong economy

Personal Income Rises

Indicates rising inflation

Personal Spending Rises

Indicates rising inflation

Producer Price Index Rises

Indicates rising inflation

Retail Sales Increase

Indicates strong economy

Treasury Auction High Demand

High demand leads to lower rates

Unemployment Number Rises

Indicates weak economy

New Job Creations

Indicates strong economy

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