Why are interest rates constantly changing?

There are several different types of rates:

bullet Prime rate: The rate offered to a bank's best customers.
bullet Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called 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).
bullet 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.
bullet Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
bullet Federal Funds Rate: Rates banks charge each other for overnight loans.
bullet Federal Discount Rate: Rate New York Fed charges to member banks.
bullet Libor: : London Interbank Offered Rates. Average London Eurodollar rates.
bullet 6 month CD rate: The average rate that you get when you invest in a 6-month CD.
bullet 11th District Cost of Funds: Rate determined by averaging a composite of other rates.
bullet 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 influence mortgage rates very strongly.
bullet 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.

Interest rates change simply because supply and demand. If the demand for loans increase, so do interest rates, because there are more buyers, so sellers can command a better price, producing higher rates. If the demand for loans is reduced, the result is lower interest rates. Economic factors also have an effect on rates. An expanding economy results in a higher demand for credit, so rates move higher, and if the economy is slowing the demand for credit decreases and so do interest rates. An easy way to remember this concept is that a good economy results in higher rates, while a bad economy results in lower rates.

Mortgage rates are also based on supply and demand for mortgages, and rates can vary from one lender to another. Lenders may reduce rates in order to meet certain commitments or deadlines. With so many factors involved in the interest rates, it is a good idea to stay in touch with your mortgage professional for the latest updates and trends in the market.

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