Mortgage rates are affected by economic factors, like inflation and market conditions, as well as personal factors, including credit scores and down payments. 

  • Mortgage interest rates are determined by a combination of complex factors, from personal credit scores to global market conditions.
  • While economic conditions shape general mortgage rates, rates are tailored to each borrower based on factors like credit scores, down payment amounts, loan types, and loan terms. 
  • To get the best possible mortgage rate, focus on improving your credit score, saving for a larger down payment, and comparing multiple loan offers. 

A mortgage interest rate is the cost of borrowing money to purchase a home.[1]As such, mortgage rates play a critical role in determining your monthly mortgage payment and your overall cost of ownership.  

Given the importance of this figure in your personal finances, you may be asking, how are mortgage rates determined?

What Affects Mortgage Rates?

Broadly speaking, mortgage interest rates reflect the perceived risk of lending. This risk of lending may be determined by large-scale economic conditions, but it may also be influenced by personal and loan-specific factors as outlined below.

Market and Economic Factors

The following economic factors regularly affect mortgage rates for homebuyers in the U.S.

Inflation

When inflation is high, the purchasing power of money decreases, so lenders require higher interest rates to offset the lower value of future mortgage payments. When inflation is lower, on the other hand, mortgage rates may dip because lenders are more confident that the money received from mortgage payments will hold its value over time.

The Bond Market and Treasury Yields

As long-term loans, mortgages are often compared to 10-year Treasury notes in terms of risk and yield as investments. When Treasury yields rise, perhaps because higher inflation or stronger economic growth is expected, mortgage rates typically increase. When Treasury yields drop, mortgage rates generally follow.[2]

Other Market Conditions and Economic Indicators 

Additional market conditions and general economic growth indicators may also affect mortgage rates. A strong job market, for example, may signal increased consumer spending and higher demand for credit, which could push inflation higher and trigger higher mortgage rates. Periods of unemployment or weak growth, on the other hand, typically prompt investors to shift toward lower-risk assets, such as bonds, which may drive down yields and mortgage rates.

Global events, such as geopolitical conflicts, pandemics, or international financial crises, may also affect mortgage rates by encouraging investors to move money into historically reliable assets like U.S. Treasuries, which lowers yields and, in turn, mortgage rates. 

Even oil prices may affect mortgage rates. Rising oil prices may drive inflation, which tends to increase mortgage rates. Falling oil prices tend to have the opposite effect on rates.

The Role of the Federal Reserve (The Fed)

The Federal Reserve doesn’t directly set mortgage rates, but it does set the federal funds rate (the rate banks charge each other for overnight loans), which influences mortgage rates by adjusting borrowing costs for banks.[3] 

The Fed regularly adjusts the federal funds rate in response to, or anticipation of, the economic factors and market conditions already discussed.[4] For example, the Fed may combat inflation by raising rates, thereby making it more expensive to borrow money and slowing the economy. Conversely, in periods of economic decline or stagnation, it may lower rates to make borrowing more affordable, thereby stimulating the economy. 

When the Fed increases the federal funds rate, mortgage rates typically go up. And when the Fed lowers the federal funds rate, mortgage interest rates tend to go down.[4]

Personal and Loan-Specific Factors

Within the mortgage rates shaped by market and economic factors, there is room for rates to be tailored to individual borrowers and their specific loans. Here are the personal and loan-specific factors that may influence mortgage rates. 

Loan Type

Different mortgage loan types (conventional loans, FHA loans, VA loans, etc.) offer different interest rates.[5] Unfortunately, there are no hard-and-fast rules regarding which type offers the lowest rates because the rates offered to individual borrowers under any given loan type also depend on the other factors covered in this section. 

Credit Score

Credit scores are numerical indicators of how responsibly people manage their debt. Generally, a higher credit score signifies greater creditworthiness. The lowest interest rates are typically offered to borrowers with the highest credit scores.[5] 

Down Payment and Loan-to-Value (LTV) Ratio

A larger down payment may be rewarded with a lower interest rate because it reduces the lender’s financial risk.[5] 

If you are able to make a 20% down payment, the LTV ratio would be 80% (since 80% of the property’s value would be covered by financing). Lenders frequently use this figure as a threshold for offering lower interest rates. Plus, homebuyers typically get the added advantage of avoiding mortgage insurance by making a down payment of 20% or more, which may reduce the overall expense of homeownership.       

Debt-to-Income (DTI) Ratio

DTI ratios measure debt obligations as a percentage of the borrower’s total verifiable income. This figure is important in assessing risk because it shows how much of your income is allocated toward debt and how much is left for living expenses. As a general rule, lower DTI means less risk and lower interest rates.

Loan Amount and Home Price

The purchase price of your new home and the required loan amount may also affect interest rates. Borrowers may pay higher rates on loans that are substantially larger than average.[5] Jumbo loans, for example, are designed for high-value properties with loan amounts that exceed the limits set by government-sponsored enterprises, Fannie Mae and Freddie Mac.  

Property Type, Purpose, and Location

Interest rates may vary slightly depending on your state or even your county.[5] The property type and purpose may also make a difference. A duplex, for example, may have a different rate than a single-family home. And a second home may have a different rate than a primary residence. 

Loan Term

Longer loan terms, like 30-year mortgages, tend to have higher interest rates than shorter loan terms, such as 15-year mortgages.[5] However, shorter loan terms typically have higher monthly payments, so it’s important to compare the overall interest savings with the monthly financial burden before choosing a shorter-term loan.  

Interest Rate Type

Many mortgage types allow borrowers to choose between a fixed-rate and an adjustable-rate mortgage (ARM). With a fixed-rate loan, your interest rate remains constant throughout the loan term. With an ARM, your interest rate is subject to change at predetermined intervals, based on changing market conditions (after an introductory period during which the rate does not change). ARMs typically offer a lower introductory mortgage rate because the risk of future rate changes is shifted to the borrower.[5] 

Points and Lender Credits

Mortgage discount points allow you to “buy down” your interest rate by paying more up front. Lender credits do the opposite; they allow you to reduce your upfront expenses in exchange for a higher interest rate. Buying points or accepting lender credits may substantially change your interest rate.[5] 

Quick Tips for Getting the Best Possible Mortgage Rate

While you may not be able to change the macroeconomic conditions affecting interest rates, you can take steps to get the best possible rate current market conditions will allow, including:[6]

  • Improving your credit score to qualify for more favorable rates.
  • Increasing your down payment. Even if you can’t get to 20%, increasing your down payment from 5% to 10% may qualify you for a lower rate. 
  • Improving your DTI by paying down debt or increasing income.
  • Shopping around for the loan option with the lowest interest rate.
  • Paying mortgage points up front in exchange for a lower interest rate.

Frequently Asked Questions About Mortgage Rates

Can You Negotiate Your Mortgage Rate?

Yes, the rate and terms of your home loan are negotiable until the loan documents are signed.[7] 

Are 15-Year Rates Always Better than 30-Year?

While interest rates are often lower on a 15-year mortgage than on a 30-year mortgage, this is not always the case. Even if rates are lower on a 15-year loan, it’s important to weigh the higher monthly payments against the overall cost savings.    

How Often Do Mortgage Rates Change?

Mortgage rates are constantly fluctuating, sometimes changing multiple times per day. When you find a rate you’re satisfied with, ask your lender about rate lock options to secure the rate while you finalize your home loan.   

Next Steps: Explore Rates with a Mortgage Loan Officer

Interested in seeing what mortgage rates you may qualify for? Connect with a PNC Mortgage Loan Officer today to find out. Your PNC MLO will help find the best product that meets your needs at a competitive rate. Call 1-855-744-2268 to connect with your PNC MLO today.