Inflation is one primary factor that lends to the fluctuation of mortgage rates. Inflation is simply the growth of economy and the increase of prices of goods and services. Economic growth brings an increased demand for goods and services, and this allows producers to raise their prices. Higher prices lends to an increase in real estate prices, rental fees and mortgage rates.

The Federal Reserve attempts to reduce inflation and slow down economy by decreasing interest rates. In the process, mortgage rates are lowered. Although mortgage rates have the propensity to fluctuate in the same direction as interest rates, their actual movements may also be based upon mortgage supply and demand.

When compared with interest rates, mortgage rates have a slightly different equation in their supply and demand. This variance is the reason that mortgage rates will sometimes move differently than other rates. For example, a lender has an obligation to fulfill, and is forced to close additional mortgages. In order to do so, he or she would have to decrease the mortgage rates, even though interest rates may be on the rise.

Additional Factors Affecting Mortgage Rates

Inflation aside, there are several other factors that can influence mortgage rates. The rates on mortgages will tend to increase as the loan amount increases. This higher fluctuation is especially true if the loan amount exceeds the established loan limits of the potential borrower. Loan limits will typically change at the beginning of each year to conform to current mortgage rate trends that have been established.

The duration of the loan can also affect mortgage rates. A shorter loan period will usually equate to a lower mortgage rate, and a longer loan can bring about higher rates. You can save thousands of dollars in mortgage payments on a loan with a fifteen or twenty year note. Of course, a shorter loan term will also mean you're your monthly mortgage payment will be higher.

To avoid this high payment, an adjustable mortgage rate may help you begin with a lower mortgage rate, but if interest rates grow, your monthly mortgage payments will rise as well. Fixed mortgage rates are typically higher than adjustable mortgage rates but they can save you money also, especially if the interest and mortgage rates go up.

Greater down payments can help you save up on your monthly mortgage rate payments. You can get the best possible mortgage rate with a down payment that is more than 20 percent. Higher mortgage rates are typical if the down payment is less than 5 percent since the beginning equity is smaller and provides less collateral.

Discount points can also affect mortgage rates. A lower mortgage rate generally means higher points paid on your loan. This same rule applies for lender fees such as closing costs. Higher closing costs paid to the lender will result in lower mortgage rates. If you choose not to pay for all the closing costs up front, the lender will increase your mortgage rate to accommodate the additional fees.

The concept is quite simple. Lenders are generally willing to lower mortgage rates as long as more money is paid upfront. More money down results in lower mortgage rates. And less money down results in higher mortgage rates.