How Are Mortgage Rates Determined? Take a Minute To See What You Can Control

If you're looking to buy a home or refinance, you’ve likely noticed that mortgage rates fluctuate. But what determines these rates? I'll focus on factors that are likely out of your control, first. Then, we can focus on how you can help yourself secure the best rate you're qualified for.

Factors Outside Of Your Control:

1. The Federal Reserve's Policies

The Federal Reserve doesn’t directly set mortgage rates, but its monetary policies influence them. By setting the federal funds rate (the interest rate at which banks lend to each other overnight), the Fed indirectly affects the cost of borrowing. When the Fed raises rates to curb inflation, mortgage rates typically rise; when it lowers rates to stimulate spending, mortgage rates tend to fall.

2. Bond Market Influence

Mortgage rates are closely tied to the yields on U.S. Treasury bonds, especially the 10-year Treasury note. When bond yields rise, mortgage rates often follow. This relationship exists because mortgages are bundled and sold as securities in the bond market. Investors seeking stable returns often view both Treasuries and mortgage-backed securities as lower-risk investments, leading mortgage rates to track bond performance.

3. Economic Conditions

Overall economic health, including indicators like inflation, unemployment, and GDP growth, impacts mortgage rates. When the economy is strong, rates tend to increase as demand for housing grows and investors expect higher returns. In weaker economies, rates often drop to encourage borrowing and spending.

Factors You Can Control:

4. Credit Score and Personal Finances

Individual factors also play a role in the rate a lender offers. Borrowers with high credit scores and stable income are considered lower risk and often qualify for better rates. On the other hand, those with lower scores or riskier financial profiles may face higher rates as a way for lenders to mitigate perceived risk.

5. Loan Type and Terms

Finally, the type of mortgage and its terms affect rates. Fixed-rate mortgages generally have higher initial rates compared to adjustable-rate mortgages (ARMs), which start lower but can change over time. Shorter-term loans, like 15-year mortgages, often come with lower rates than longer 30-year terms because they’re paid off sooner.