What makes mortgage rates rise and fall? Many misperceptions and myths attempt to explain the mystery behind interest rates, but the best way to look at what moves them is a combination of related factors of the economy, including the supply and demand of credit, inflation, the Federal Reserve and even you, the consumer.

“If you look at mortgage rates, you need to know they are really pushed and pulled by various currents in the economy,” says Keith Gumbinger, a vice president at HSH Associates. Your interaction with those currents as a consumer ultimately affects interest rates.

For instance, when you deposit money into the bank, you are increasing the amount of money made available to borrowers, or increasing the supply of credit. As the supply of credit increases, interest rates, or the price of borrowing, decrease. Conversely, when you borrow money or keep a balance on a credit card, you are decreasing the amount of credit available in the market, which in turn raises interest rates.

The demand for credit also affects interest rates. A sluggish economy usually reduces credit demand because people spend and borrow fewer dollars, causing a decrease in interest rates, while an increase in the demand for credit will raise interest rates. Yet another factor in the sea of economic currents: inflation. Interest rates tend to rise during times of inflation because lenders need to charge more to compensate for the reduction in purchasing power of the original loan.

The Federal Reserve’s federal funds rate, contrary to popular belief, has only an indirect effect on mortgage rates, and it affects various kinds of mortgages and home financing differently. The Fed rate is the overnight interest rate that banks charge each other when one bank borrows from another, or simply, the shortest of short-term rates. Yet, the Fed rate has very little to do with what’s going on at the longer end of the yield, such as a 30-year fixed-rate mortgage, says Matthew Connelly, general manager at GoApply. Mortgage rates, he adds “are more directly affected by what happens every day in active public markets.”

What happens when the Fed cuts interest rates? It sounds counterintuitive, but often, fixed mortgage rates actually increase. That’s because fixed rate mortgages are linked to Treasury bonds and are influenced by competing investment options like stocks. A Fed cut often causes investors to move their money to stocks and away from mortgage-backed securities and bonds. When the demand for mortgage-backed securities and bonds decreases, the yields rise in order to entice investors back. In the end, actual rates on underlying mortgages also rise as a consequence.

As fixed-rate mortgages rise, adjustable-rate mortgages — especially subprime ARMs — are also likely to rise because they are generally tied to Libor, the London Interbank Offered Rate. Home equity lines of credit, on the other hand, will have a lower rate following a Fed cut because they are directly tied to the prime rate, which generally runs about 3 percent above the federal funds rate.

“The Fed’s move influences certain kinds of mortgage pricing, but not all,” Gumbinger says, “There is not a magic Fed with a magic wand. It doesn’t work that way.”