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How Mortgage Interest Rates are Determined

How Mortgage Interest Rates are Determined

In the last month we have had several great conversations with our customers over our website chat but one question that stands out most is, “What are your interest rates?” And boy, is this a tough one to answer. We could take the easy way out and tell you what our lowest available rate is at that moment. But we don’t because we may not be able to offer that rate to you. You see, interest rates vary by person, by circumstance, by day. There are some factors you can control like your credit score, and some that you can’t like the unemployment rate. Let’s take a look at the factors that affect your mortgage interest rate. Being armed with this information, you can feel confident when comparing rates and shopping for your mortgage.

Factors You Can Control

Credit Score

The higher your credit score, the lower the interest rate. Those with excellent credit (740+) will have the largest range of loan products to choose from and will receive the best interest rates. The loans available to those with lower credit scores are typically government insured and come with a higher interest rate.

Loan-to-Value Ratio

The loan to value ratio is determined by how much is put down on a house. For example, if you put $20,000 on a $100,000 home then your loan amount would be $80,000 giving you an 80% loan-to-value ratio. The lower this ratio the better the interest rate will be because the lender is not assuming as much risk as they would with a property that has a 95% loan-to-value ratio.

Type of Property or Loan

Lenders may charge more for loans on manufactured homes, condominiums, second homes, or cash-out refinances because these loans may have more risk.

Factors Beyond Your Control

Economy, Inflation, and Unemployment

The overall rise and fall of mortgage rates is set by market forces including the overall economy. If there is an expectation of economic growth, low unemployment and higher inflation, then interest rates will tend to rise. The opposite tends to be true as well, if the economy is slowing down then interest rates will usually fall. While this is the pattern we have seen, it is not always the case.

Federal Reserve

The Federal Reserve Bank (FRB) does not set mortgage interest rates, but through its Open Market Operations, the FRB can cause short term interest rates to rise or fall. Despite being independent of each other, mortgage rates will rise and fall in line with the economic forces.


When shopping for a mortgage, consider how each of these factors may be affecting your rate and feel free to ask questions and discuss them with your mortgage banker. It is our job to help guide you to the best financial decision, but it is ultimately your decision on what you do. If you have some questions or would like to get an idea of the interest rate available to you, feel free to reach out to a mortgage banker in your area or visit our online chat Monday- Friday from 9:00am- 5:00pm eastern time.

Let us guide you home.