Homebuyers

Why Mortgage Rates Can Change Overnight and What You Can Do About It

Picture this: You find a great home at a good price, but you decide to sleep on it before submitting an offer. When you wake the next morning, eager to move forward, mortgage interest rates have ticked up by a quarter of a percent.

Suddenly, you're wishing for may be beyond your financial reach.

It’s a frustrating reality of today’s housing market: Mortgage rates don’t sit still. They move up and down, often multiple times a day. But there are steps you can take to lock in a rate and insulate yourself from swings.

Even small shifts in interest rates can have a meaningful impact on which home you can afford and how much your monthly housing payment will be each month. For homeowners hoping to refinance an existing mortgage, a rate jump can be equally frustrating.

“These changes can be substantial,” said Realtor Alexei Morgado, founder and CEO of Lexawise, a real estate exam preparation company.

So why do rates move so much, and so fast? And what can you do to protect yourself? Here’s what you need to know.

Does the Fed set mortgage rates?

Many homebuyers believe the U.S. Federal Reserve sets mortgage rates. That’s not true.

The Fed determines its Federal Funds rate, an interest rate that is separate from mortgage rates. However, the Fed’s rates influence mortgage rates.

So, when the Fed indicates it’s likely to cut rates, mortgage rates often dip. Similarly, if the Fed is likely to raise rates, mortgage rates generally increase.

How bonds affect mortgage interest rates

To understand why mortgage rates fluctuate, it helps to know what drives them in the first place.

Rates are closely tied to the yield on 10-year U.S. Treasury bonds, which are a low-risk investment. When investors buy more bonds (typically in times of economic uncertainty), bond yields fall, and mortgage rates tend to follow.

When investors later sell those bonds and move money into riskier assets, like stocks, bond yields rise. And so do mortgage rates.

Other market movers that impact mortgage interest rates

Like the economy as a whole, mortgage rates are complex. There are so many other factors that can send them up and down.

“Anything that affects investors, such as employment numbers, inflation, or world events, can cause your rate to change several times an hour,” said Morgado.

That can include:

• Economic data, such as inflation, gross domestic product (GDP) growth, and unemployment rates. That’s because the Fed typically raises rates to bring down inflation or lowers rates if unemployment is high.
• Major world events, such as war, political instability, destructive storms, or, as we saw earlier this decade, global pandemics.

How minor rate changes can impact your ability to buy a home

A quarter point rate change in either direction may not sound significant. But when you’re purchasing something that costs several hundreds of thousands of dollars and paying it back over 30 years, a slight fluctuation in rates can have a major impact on how much you spend each month and in the long run.

“If you are buying a house today…[for] about $400,000, a small change of a quarter of a percent in interest rate can change the monthly payment by about $65,” Morgado explained. Over a 30-year mortgage, that difference will cost you roughly $23,000.

When you factor in new-to-you costs as a first-time homebuyer, such as home insurance, property taxes, private mortgage insurance, higher potential utility costs, HOA fees, and home repairs, a $65 difference in your monthly budget can be a big deal.

How to protect yourself from rate volatility

The good news? There are steps you can take to reduce your exposure to rate swings:

Lock in your rate

Once you’re under contract on a home, ask your lender about a rate lock. This guarantees your interest rate for a set period (usually 30 to 60 days) while you work through closing. If you like your rate and are worried rates may increase in the coming weeks, this can be a smart move.

Ask about a float-down option

If you’re worried rates could go down after you lock in yours with your lender, you can instead ask about a float down.

“A float down is a rate lock that cannot be raised, but can be lowered if rates fall before closing,” Morgado explained. “Everyone should ask their lender about this before they’re under contract, because rates are changing so quickly.”

If you’re refinancing your home loan, watch the break-even point

If you’re hoping to refinance, run the numbers on how long it will take to recoup the closing costs (called the refinance break-even point).

If rates have started to inch back up after you’ve been watching the market, but they’re still notably lower than your current rate, it may still make sense to refinance to lower your payments. You want to make sure you’ll recover the refinance costs within a few years.