Most consumers don't understand the admittedly byzantine convolutions of the way mortgage rates are calculated. The first thing you must understand is that there are many different interest rates that together affect your overall mortgage rate, including the following:

·Prime Rate: offered to the bank's best customers

·Treasury Bill Rate: Short-term debt instruments with interest rates set by the U.S. Government and used to finance the government's debt. Treasury bill rates are calculated on the period the bill is good for (3-month treasury bill rate, one year treasury bill rate)

·Treasury Notes: Intermediate-term debt instruments similar to treasury bills

·Treasury Bonds: Long-term debt instruments similar to notes and bills; these come in 30-year denominations.

·Federal Funds Rate: Influenced by the US government, this is the rate banks charge one another for overnight loans

·Federal Discount Rate: Set by the US government, this is the rate the New York Fed charges to member banks and directly influences the Federal Funds Rate.

·LIBOR: London Interbank Offered Rates, overnight loans charged on London Eurodollars

·6-month CD rate: Average interest rate on a six-month certificate of deposit

·11^th District Cost of Funds: Rate determined from an average of several other rates

·Fannie Mae-Backed Security Rates: Bulk securities from Fannie Mae-held mortgages, these securities rates directly influence national mortgage rates

·Ginnie Mae-Backed Security Rates: Bulk securities similar to the Fannie Mae securities, but held on FHA and VA loans.

Fluctuating interest rates are based on supply and demand. If the demand for credit goes up without the supply of credit increasing, interest rates also go up. When the economy expands, there's a higher demand for credit, so interest goes up; when the economy is slow the demand decreases. Manipulations in the Federal Reserve rate, as shown by Alan Greenspan over the last decade, can moderate or even reverse these trends.

However, in general a slowing economy is good news for the consumer in lowered interest rates, while a growing economy is bad news for the consumer, with highr interest rates. High inflation generally signifies higher interest, and it is in response to this that the Federal Reserve rate will be manipulated to slow the economy down and reduce the pace of inflation.

Mortgage rates also tend to move in the same direction as interest rates, but the actual numbers are based on mortgage supply and demand, which can be quite different from the rest of the consumer market.

Bond prices and bond rates are inversely related – when prices move up, interest rates move down. That's because the maturity price is attached directly to the interest rate. A bond that matures at $1000 is purchased at a lower price; the higher the interest rate on that bond, the lower the price will be.

Before a mortgage loan is closed, an interest rate must be locked in. There are four different parts to the rate lock:

·The loan program

·The interest rate

·Points on the loan

·Length of the lock

A long lock length means higher points or interest rates because this means a greater risk for the lender.

A typical lock would look like this: you have a thirty-year fixed rate mortgage loan locked at 8% for two points for fifteen days, finalized on January 31. Your lock will expire on February 15, or on the first working day after that day. If the lender does not disburse loan funds by that expiration date, your rate lock will expire and you will have to get another one.

A lock good for a longer period of time will have a higher point charge; this means that a slow close will cost you money. You can get a longer lock at a slightly higher interest rate instead of higher points, if you negotiate with your lender; this saves you money up front.

Upon the expiration of a lock, you can usually re-lock at either the prevailing rate and points or the original lock; rarely will you have a lower interest rate on a pre-approved loan. You may be charged an additional fee for this extension. Again, a delayed close will cost you money.

Why does the lender charge you like this? Because they lose money if your lock expires. Interest rates can change rapidly, and they are committing a loan to you that they might be able to disburse to someone else at a higher rate in a day or two. With a locked rate, they have to give you the loan at the original rate.

If you think the market is going to change fast, soon, you can negotiate for a free float-down. This is a situation where the lender gives you a better rate if interest rates fall while your rate is locked. You'll have to pay a slightly higher interest rate for this option, but if you're a gambler and things are changing, it may be worth it.

Unless you've built that float-down into your loan, lenders don't really care if the interest rate drops while you've got your rate locked. They may look at it if rates drop substantiallly and quickly, and don't appear to be fluctuating back upward (substantial is 3/8% or more.

You do have other options. If you've gone directly to a bank, you can go to a different lender and start the process over again. You may not have to go all the way through with this, because just looking at another bank gives you some leverage over your original bank.Let your original lender know that rates have dropped and you're considering your options; they may be happy to work with you rather than lose you to a competitor.

If you've taken your loan out through a mortgage broker, they may be able to easily and quickly move your loan to another bank with more favorable rates. You should ask about it.

Some lenders lock you into an interest rate only on a specific property. That means that you can't lock your rate until you have signed a purchase contract. Other lenders, however, will make a lock-and-shop program available to you, in which you can lock in a rate before you find a home. When rates are rising, this can be very nice; but this will almost certainly cost a little more than the prevailing rate, and the lender may charge a non-refundable fee or a deposit toward closing costs to ensure you do use their loan.

If you're building your home, lenders generally offer long-term locks for a higher fee and an up-front deposit. Locks for these loans can be as long as 180 days or more, but will cost a point or two more. Most of these locks do offer a float-down, so shop around until you find one.