The spread of COVID-19 has impacted the US economy in unprecedented ways. Even with March 15th’s record-breaking federal interest rate cuts, many homeowners are surprised to find that rates are either higher than expected or changing rapidly from day-to-day.

Here are the four key factors affecting mortgage rates today:

1. Market volatility
2. Supply and demand
3. Federal Reserve actions
4. Limited lender capacity

Market volatility

Volatility refers to how big the up and down swings of the markets are. When markets are swinging wildly, as they are now, investors attempt to protect themselves from risk. Lenders in particular guard themselves by holding rates steady, even as other interest rates drop. This can lead to borrowers seeing higher-than-expected rates. In fact, last week, mortgage rates had the biggest single day increase since 2016.

Supply and demand

When mortgage rates hit all-time lows in the last two weeks, the number of homeowners applying to refinance skyrocketed. These applications have been funnelling through the pipeline and affecting the price of mortgage backed securities (MBS) — bundles of mortgages that can be bought and sold. Although the applications themselves have not been funded into mortgages, lenders use financial transactions to transfer the risk associated with holding such mortgages in their pipeline. These transactions can change the prices of MBS, and last week they went haywire. Since the price of MBS directly affects how much lenders will be paid for the mortgages they sell, this action affects the rates that can be offered to borrowers. And due to those risk-transferring transactions caused by incoming supply, the price of MBS have dropped. When the price goes down, rates go up – they have an inverse relationship. Which is what we saw happen last week.

Bottom line: with an increased number of mortgages floating around out there, lenders have to sell them for less, and rates go up to compensate.

Federal Reserve actions

On Sunday, March 15th , the Federal Reserve (commonly known as the Fed) made another emergency rate cut, slashing the federal fund’s rate by roughly 1%, down to 0 to 0.25%. However, changes in the federal funds rate don’t really correlate to changes in mortgage rates; the more important news for the borrowers is that the Fed is going to buy $500B of US Treasuries and $200B of mortgage backed securities (MBS).

This is important for two reasons:

1. The more that US Treasuries are traded, the more freedom banks and financial institutions have to lend money. If trading in these bonds gets too low, it can “lock up” the flow of credit from banks to borrowers. The program is designed to “encourage free flow of lending/capital.”
2. The more MBS that are bought, the higher the price of MBS (i.e. the Fed is increasing demand for MBS). By buying MBS, the Fed is directly trying to lower rates for borrowers. We will see this action start to take effect over the coming months, though it is uncertain how much of an effect it will really have.

Limited lender capacity

Separate from factors that affect the markets, lenders themselves are strained for capacity to create mortgages. At JP Morgan Chase, mortgage application activity was over three times higher than average. Some large lenders are having trouble returning calls for up to 72 hours, much less making new outbound ones.

Lenders are dealing with this huge influx of new applicants by raising rates, with some lender’s sites quoting up to 4.375%. Lenders are removing themselves from rate comparison sites, ending marketing campaigns, and increasing rates to slow the inflow of new applications. For traditional lenders without an online presence, COVID-19 quarantines will likely put extra stress on their operations.

What this means for you
While we can better understand the factors affecting mortgage rates right now, predicting where rates are headed is a different story. For homeowners in the market for a mortgage, checking rates daily and locking when it makes financial sense to do so is still a sound practice.

This article was originally published on Better.com