Watching mortgage rates can feel like watching waves rise and fall.

Just when you think your figure has leveled off, a new headline could send it climbing again. While it is tempting to view these fluctuations as arbitrary decisions by banks, mortgage rates actually respond to a complex mix of economic indicators, investor behavior, and government policy.

If you are currently house hunting, budgeting around your mortgage costs, or considering a refinance, learn more about what’s behind these rates so you can strategize more effectively. Here are the primary reasons mortgage rates may go up.

The Federal Reserve and the fight against inflation

While the Federal Reserve does not set mortgage rates directly, its actions can create a ripple effect through the entire lending industry. The Fed’s primary tool is the federal funds rate: the interest banks charge each other for short-term loans.

When the Fed sees inflation rising too quickly, it often increases this rate to “cool” the economy. This can make it more expensive for banks to borrow money, and, in response, they may pass those higher costs on to you. If the cost of living continues to rise, lenders anticipate that the Fed will keep rates elevated, and they often adjust their mortgage pricing upward in response.

The bond market and the ten-year treasury yield

While the above is a strong factor, mortgage rates may actually respond to the ten-year Treasury yield much more closely. This is the rate that the government agrees to pay for loaning money for a decade. When bond prices drop and yields rise, mortgage rates typically follow. This happens because investors demand a higher “risk premium” to invest in mortgages compared to safer government debt.

Economic strength

It sounds counterintuitive, but good news for the economy as a whole is often bad news for mortgage rates. When the Department of Labor releases a strong jobs report showing low unemployment and rising wages, this tells lenders that people have more money to spend, which can lead to higher inflation. A strong economy also increases the demand for all types of loans, from credit cards to mortgages, and high borrowing demand may lead to less-competitive interest rates.

Global instability and market sentiment

The United States does not exist in a financial vacuum. International events, such as geopolitical tension in Europe or shifts in Asian markets, can influence domestic rates. If global investors feel uneasy, they may shift their money into different currencies or assets, affecting the liquidity of the US mortgage market.

Mortgage rates and you

If you are planning on buying or selling a home, then these figures can directly affect your finances and shifts in the real estate market. So naturally, coming to understand current rates can only be to your advantage. And while it’s impossible to predict these changes exactly, you can contact a financial professional or real estate agent for their expert guidance on this topic—for now and the months ahead.