There are a few really important numbers when it’s time to obtain a home loan: your credit score, the amount you want to borrow, and the interest rate. The news is full of talk about interest rates lately. Will they go up? Will they go down? Will they stay down? When they go up, how far will they go?
It’s a losing battle to follow the news on mortgage interest rates on a daily basis if you’re hoping to lock in the best possible loan rate. However, you can certainly get a sense of key trends by keeping your eyes and ears open regarding the 10-year Treasury, the Federal Reserve, and mortgage interest rates.
Before you do that, you’ll want to make sure you understand what factors influence mortgage rates.
Understanding what affects mortgage interest rates and what drives mortgage rates higher or lower can help you make smarter timing and budgeting decisions. While no one controls the market, knowing the mortgage rate factors at play makes the news a lot less mysterious and the homebuying process a lot less stressful.
How Supply and Demand Affect Mortgage Rates
The overall economy affects mortgage rates. When the gross domestic product (or GDP) and employment rise, it’s a sign of a growing economy, so there is a greater demand for goods and services, including real estate. A growing economy creates competition from those wishing to borrow money. This demand causes interest rates to rise.
The opposite is true in a slowing economy. When demand falls, interest rates tend to go down.
In terms of home loans, the “supply” is the money (or credit) available to lend. High demand for mortgages means banks have less money to lend; therefore, the cost of a loan rises as interest rates increase.
This also means that when there is more money to lend or an increase in the supply of credit, the cost of borrowing decreases as interest rates fall.
How Inflation Impacts Mortgage Rates
Does inflation affect mortgage rates? Yes, significantly. Inflation is one of the most consistent drivers of mortgage rate movement. Everyone is affected by inflation. You, your mom, your dry cleaner, and even your bank.
Inflation occurs when the money supply used to purchase products exceeds the products available for purchase. The bigger the gap, the higher the inflation. Put another way, a high rate of inflation means your dollar doesn’t go as far. You have to do more with less.
Higher inflation will typically cause Treasury yields and mortgage rates to rise as well. This occurs because investors demand higher rates to compensate for the decrease in the purchasing power of the money they are paid over the course of the loan.
Does the Federal Reserve Control Mortgage Rates?
The short answer: not directly. The Federal Reserve doesn’t set mortgage rates, but its decisions ripple through the markets that do. Talk about something that has dominated the news lately! When the Fed, short for the Federal Reserve, raises or lowers the federal funds rate, the benchmark rate lenders charge one another, it can create a ripple effect that results in higher or lower mortgage rates. While the federal funds rate doesn’t have a direct impact on mortgage rates, it affects many markets that do.
This rate can be as low as ZERO, if you can believe it, and it affects the bottom line of those offering credit. When the Fed is trying to control inflation or cool the market, it starts raising this rate, usually in increments over time. When it’s trying to spur the economy, it starts lowering the federal funds rate.
While it’s good to keep an eye on what the Fed is doing, it’s more important to watch the economy as a whole and pay attention to Treasury yields for a better indicator.
Geopolitical Factors
The global economy is more closely tied together today than ever before. Global economic factors and other world events can affect interest rates in the United States, even when they seem to have no direct correlation with the U.S. economy.
Government Intervention
The U.S. government may step in to help influence interest rate movement when necessary. This is primarily accomplished when the government directly purchases bonds and other securities for sale in the open market.
In short, when the economy is strong and growing, rates rise, making this investment vehicle more attractive to investors. When the economy is sluggish, borrowers become choosier about how they spend their money, so rates fall to attract more investors.
Special Circumstances
Sometimes what causes mortgage rates to rise or fall has nothing to do with the usual factors at all. We’ve given you the general lowdown on factors that influence mortgage rates … but we probably know what you’re thinking. “Wait a minute, the demand for mortgages is high right now, yet rates are super-low. That isn’t in line with what you just said!”
Certain factors and environments can override these broad trends. The pandemic, for example, would be one of them. The Great Recession is another. Election years, war, natural disasters, and even the price of oil can influence interest rates.
Now that we know the macro reasons interest rates change, let’s talk about the micro reasons. Those are the ones that personally affect you!
Why Mortgage Rates Change Daily
Mortgage rates can, and often do, change every day, and sometimes more than once a day. Understanding why mortgage rates fluctuate this often helps explain why the rate you saw advertised last week may not be the rate you’re quoted today.
Most home loans are eventually packaged and sold to investors as mortgage-backed securities (MBS). MBS trade in the bond market alongside Treasury bonds and other fixed-income investments, and their prices move continuously in response to investor demand. When investors are willing to pay more for MBS, lenders can offer lower mortgage rates. When MBS demand drops, mortgage rates rise.
A few specific triggers tend to move things on any given day:
- Treasury yields, especially the 10-year Treasury, which moves in close (though not perfect) correlation with mortgage rates.
- Economic data releases like jobs reports, inflation readings, or GDP updates, which shift investor expectations.
- Federal Reserve announcements, which can move bond markets immediately, even when the Fed itself doesn’t directly set mortgage rates.
- Geopolitical or unexpected events that drive investors toward or away from bonds.
This is why mortgage interest rate trends matter more than any single day’s rate. Your loan officer watches these market signals constantly and can help you understand whether the current movement is noise or a meaningful trend.
How Your Credit Score Affects Your Mortgage Rate
Your credit score is one of the most important personal factors lenders use to set your mortgage rate. Mortgage lenders want to feel confident that you’ll pay back your loan, and they’re willing to trade a lower interest rate for that peace of mind.
So what credit score gets the best mortgage rates? Though every lender is different, borrowers with a credit score above 700 typically get the best interest rate offers. That said, those with scores as low as 620 (and in some cases even lower) can still qualify for a mortgage.
Don’t fret if your credit isn’t perfect. There are plenty of ways to raise your credit score. A trusted APM Loan Advisor is also available to discuss your unique credit journey and homeownership goals with you.
While we’re on the subject of credit scores, here’s another perk of a higher score: The cost of private mortgage insurance, or PMI, is reduced. PMI is required on a home loan if you’re putting less than 20% down.
How Property Type Affects Your Mortgage Rate
A house is a house … right? The literal structure may be, but the use of the house means a great deal to lenders. Borrowers who plan to occupy the home as a primary residence will receive the best mortgage rates.
You’ll have a higher rate if you’re buying a second home. Also known as a vacation property, a second home is a place you plan to live in at some point during the year and won’t rent out to others.
If you do plan to rent out your second home—either long-term or short-term—it is considered an investment property, which tends to come with the highest rates.
Certain property types, such as a condominium or townhome, may carry different pricing than single-family homes depending on the loan program and other risk factors.
How Your Down Payment Impacts Your Mortgage Rate
Lenders are all about mitigating risk, so the more skin you have in the game, the better they feel about you as a borrower.
While larger down payments can sometimes improve pricing, many buyers successfully purchase homes with far less than 20% down depending on the loan program. Some lenders are okay with 15%, while others can tolerate 10% (and even less with certain loan types, such as FHA or VA). Whatever their tolerance level is, if you’re outside it, you may be hit with a higher rate.
And don’t forget, less than 20% down means paying private mortgage insurance. PMI increases your monthly housing cost and varies based on your credit profile, down payment, and loan structure. While this doesn’t raise your mortgage rate, the end result can be a higher payment.
Why Mortgage Rates Differ Between Borrowers
If you and a friend apply for a mortgage on the same day with the same lender, there’s a good chance you’ll be quoted different rates. That’s because what factors determine your mortgage interest rate go well beyond what the market is doing on a given Tuesday.
Lenders price each loan based on a risk assessment of that specific borrower and loan scenario. The advertised rate you see online is generally a best-case scenario; your actual rate reflects:
- Your credit score: The higher the score, the lower the perceived risk, and the better the rate.
- Your loan-to-value ratio (LTV): A function of your down payment relative to the home’s value. A lower LTV typically earns a lower rate.
- Your debt-to-income ratio (DTI): A higher DTI signals more financial strain and can affect pricing.
- The loan type: Fixed-rate vs. adjustable-rate, conventional vs. FHA/VA, conforming vs. jumbo.
- The loan term: 15-year loans typically price lower than 30-year loans.
- The property type and occupancy: Primary residences price better than second homes or investment properties.
- The rate lock period: Longer locks can carry slightly higher pricing.
Because so many variables go into mortgage pricing, two borrowers with similar incomes can end up with meaningfully different rates. The upside: Several of these variables are within your control.
How to Qualify for a Lower Mortgage Rate
You can’t control inflation, the bond market, or what the Fed decides next, but there are several levers entirely within your control that can meaningfully lower your mortgage rate. Here’s how to qualify for a lower mortgage rate, and how to position yourself for the best offer when you apply.
Raise your credit score before you apply. Even a 20- or 40-point bump can move you into a better pricing tier. Pay down credit card balances, avoid opening new credit lines in the months before applying, and review your credit report for errors.
Lower your debt-to-income ratio. Pay down existing debt—especially credit cards and auto loans—before applying. A lower DTI both improves your odds of qualification and can earn you better pricing on certain loan programs.
Put more money down if you can. A larger down payment lowers your loan-to-value ratio, which reduces lender risk and your rate. Getting to 20% down also eliminates the cost of PMI, which effectively functions as a rate increase of around half a percentage point.
Shop multiple lenders. Lenders price differently based on their funding costs, fee structures, and appetite for certain loan types. Pulling rate quotes from a few lenders within a 14- to 45-day window counts as a single inquiry for credit score purposes, so rate shopping doesn’t meaningfully hurt your score.
Consider discount points. If you have cash available and plan to stay in the home for several years, paying for discount points upfront can lock in a lower rate for the life of the loan.
Choose your loan term carefully. A 15-year fixed-rate mortgage typically has a lower interest rate than a 30-year loan. If your budget can support the higher monthly payment, you’ll save on both the rate and total interest over the life of the loan.
Consider an adjustable-rate mortgage if it fits your timeline. ARMs often start at a lower rate than fixed-rate loans. If you’re confident you’ll sell or refinance before the initial fixed period ends, an adjustable-rate mortgage can deliver real savings.
Time your rate lock thoughtfully. Your loan officer can help you interpret current market trends and decide when to lock in.
Small improvements in any of these areas add up. An APM Loan Advisor can walk through your specific situation and help you identify the highest-impact moves for your scenario.
Interest rates will always be a big part of the homebuying conversation—and the factors driving them aren’t going anywhere. What changes is the mix of those factors at any given moment, which is why the rate environment can sometimes feel like a moving target.
Here’s the good news, though: Regardless of what the broader market is doing, several of the most important factors that shape your mortgage rate are within your control. Strengthening your credit, lowering your DTI, building your down payment, and choosing the right loan structure can all meaningfully improve the rate you’re offered, in any market.
An APM Loan Advisor is always here to answer your questions and get you started on the path to homeownership.
Frequently Asked Questions
What’s the difference between APR and the interest rate?
The interest rate is the cost of borrowing the loan principal, expressed as a percentage. The APR (annual percentage rate) is broader in scope. It includes the interest rate plus most of the upfront costs of obtaining the loan, such as discount points, origination fees, and certain closing costs. Because APR includes those costs, it’s usually higher than the interest rate and is a more accurate way to compare loan offers from different lenders.
Does your debt-to-income ratio affect your mortgage rate?
Yes, indirectly and sometimes directly. Lenders use your debt-to-income ratio (DTI), the share of your monthly income that goes to debt payments, as a key measure of risk. A high DTI can limit which loan programs you qualify for, can affect pricing on certain programs, and in some cases can disqualify you altogether. Lowering your monthly debt before applying often improves both your odds of qualification and the rate you’re offered.
Does the loan term affect your interest rate?
Yes. Shorter-term loans, like a 15-year mortgage, typically come with lower interest rates than 30-year loans, because the lender’s risk is spread over less time. The trade-off is a higher monthly payment. The right term depends on your monthly budget and how long you plan to stay in the home.
Are mortgage rates different for fixed-rate vs. adjustable-rate loans?
Yes. Adjustable-rate mortgages (ARMs) usually start with a lower rate than a comparable fixed-rate mortgage. Still, that rate can change after the initial fixed period, typically 5, 7, or 10 years, based on market conditions. A fixed-rate mortgage holds the same rate for the life of the loan. Which one is “better” depends on how long you plan to keep the loan and your comfort with future rate movement.
If mortgage rates are high when I buy, can I refinance to a lower rate later?
Yes. If rates drop meaningfully after you close, you can refinance into a new loan at the lower rate. There are closing costs involved, so a refinance generally makes sense when the rate drop is large enough that the monthly savings will recoup those costs in a reasonable time frame. The old “rule of thumb” is to consider refinancing when rates fall by about 0.5% to 1% below your current rate, but there are many other factors to consider in today’s market, including loan size, cash flow goals, debt consolidation considerations, and even your breakeven point, all of which depend on your specific loan.
Does shopping multiple lenders actually get you a lower rate?
It can. Different lenders price loans differently based on their funding costs, their appetite for certain loan types, and the fees they charge. Pulling rate quotes from a few lenders within a short window, typically 14 to 45 days, depending on the credit scoring model, counts as a single credit inquiry, so rate shopping doesn’t meaningfully hurt your credit score.
