In this article I wanted to take some time to educate you on what drives mortgage rates. Most home owners will hear on the news that rates have gone up or down, but have no clue why, and will act accordingly. Armed with some knowledge you will better understand what causes the rates to change and how to interpret the market to predict where rates will go next.

The basic of mortgage rates like many other things in our economy comes down the principle of supply and demand. In this case we are taking about the supply and demand of money. The larger of a supply of money competing for mortgages the lower the rates will be.

To break down this even further, when we talk about the "supply" of money we are talking about investment dollars, and in the US there are two major categories of markets competing for these investment dollars, the stock markets and the bond markets. Generally speaking when the stock market has a bad day investors will move their money to a safer place which is often the bond market. When money is flowing in to the bond market there is more money competing for the same amount of bonds, which will drive bond prices up and the yield(return rate on bonds) down. When the yield of bonds go down mortgage rates also go down.

The bond most analysts use to represent mortgage rates is the 10 year US Treasury bond. When the yield on the 10 year treasury bond goes up expect mortgage rates to follow and vice versa. So to sum it all up something like Apple coming out with bad sales figures could send the stock market plummeting, which can cause money to flow into bonds, which will drive the yield on the 10 year treasury down, which will cause mortgage rates to go down. This concept will give you the basics of what to look for when trying to figure out what rates will do next.