During times of economic slowdown, the Federal Reserves Bank decides on the appropriate measures how to deal with the situation. There are two main economic policies on how to fix an ailing economy. One is through fiscal policy wherein taxes and government spending are being dealt, while the other is through monetary policy of central banks that focus mostly on interest rates.

The US Federal Reserve Bank tweaks interest rates during an economic bust or boom to keep matters in equilibrium. The Fed Board meets to discuss this decision. When interest rates are treated, this signals that there is neither too much money supply nor too little going around the economic system. When interest rates rise or fall, the banking sector absorbs the blow. Although different sectors of the economy will be affected in the long run, its effect on the mortgage interest rates do not happen in an instant.

Fed rates are indicators for banks overnight borrowings to maintain reserve requirements to avoid bank runs. The Fed usually increases interest rates to calm rising inflation and cut the supply of money in the economy. During recession, the Fed nips it to curb recessionary effects. Inflation and recession then influence the mortgage rates giving it some time before the impact is felt.

When banks approve loans for purposes of purchasing new homes or refinancing, banks then resell them to Fannie Mae (FNMA), a nationalized mortgage company, or Ginnie Mae (GNMA). The funds obtained from these financial institutions will be used again to finance more loans.

These financing agencies belong to the secondary lender market wherein the funds they use to buy out loans from banks come from selling their securities as bonds. These securities are billion dollars worth of individual mortgages to be sold. Once these mortgage-backed securities are repackaged as bonds, people and other institutions perceive these as secure investments. Stocks and bonds usually go up against each other in the market as form of investments. When the demand for bonds is high, meaning interest rates are attractive, its effect is felt in the stock market wherein there is a dip in the investments, and vice versa.

For these bonds to lure more dollars, there should be a higher rate of return, which then translates to high interest rates of mortgages sold. This activity drives interest rates of mortgages to vary every day. Mortgage rates vary, depending on economic conditions of different countries according to different lenders.

Several economic indicators influence a lender's decision to determine a viable interest charge to mortgages. If a country is experiencing economic lag due to default rates in different sectors such as banking or property, lenders draw back in giving out loans. And when they do amidst higher risks, they set assurance by imposing high interest rates.

Lenders also have to consider the qualification of clients such as credit scores. They also check for debt-to-income and loan-to-value ratios. Loans differ accordingly; that is why the advice of a professional mortgage planner should be sought.