What Causes Mortgage Rates to Rise and Fall?

Foreclosure; photo by respres, via Flickr

Question/Comment: What causes mortgage rates to rise and fall? Will the stimulus or the remaining TARP money have any affect on mortgage rates? I heard of an attempt to temporarily lower rates to four percent but nothing since.

Paul Solman: Generally, as with anything else, the supply of, and demand for, home loan money determines the overall mortgage interest rate. Government subsidies and/or pressure and the borrower’s ability to pay then affect the rate on individual loans.

One policy proposal has been, as you say, to lower mortgage rates to four percent or so. And one way to do it is have Uncle Sam make the loans. The U.S. government now pays less than three percent on the money IT borrows (for 10 years or less) and less than four percent (as of Feb. 16) for 30-year loans.

As a result, we are in a position to borrow money and re-lend it to homeowners at four percent. Not much of a margin, but then the government isn’t in the profit-making business. The idea is that this would revive the housing industry all by itself.