It was a crazy week for mortgage rates. Depending on when you closed or locked in on your rate, you could have gotten a 30-year fixed rate as low as 5%, or if you had bad luck, you ended up with a rate of 5.625%. That’s for a conforming loan in the Kirkland, Washington, or Seattle market. So, what makes the mortgage rates fluctuate so widely and how are they determined?

Many people hear the Federal Reserve cut their prime rate by a quarter or half a point and they expect that mortgage rates will drop in concert. I won’t say there is not any relationship, but I can say there is not a direct relationship. The true affect on mortgage rates comes from the capital markets. Capital markets is where various securities are traded. In simplistic terms, it’s Wall Street. In minute terms, it even trickles down to you and I as investors in mutual funds and other investment vehicles tied to mortgages.

Mortgage market makers are in place to figure out at what rate will investors buy mortgages and at the same time keep the rates low enough for the average Joe to want to buy a house. It’s a difficult balancing act. When rates go higher, it’s generally because investors feel the rates are too low and so they go off and invest in other securities. The mortgage market maker will then raise rates slightly to entice the investors to come back and invest in mortgage securities. When interest rates drop and are low, that means there is a higher demand for mortgage securities. This was the case around 2001 – 2005 when the housing market was hot. The investors were buying mortgages as quickly as they could. This is true whether you’re buying a house, or commercial property.

There are other factors that affect the mortgage rates, but supply and demand of mortgage securities is the one that really plays the biggest role.