What Changes Mortgage Rates?

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Published July 15, 2022
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Interest rates play a huge role in determining how much a home loan costs. Some factors that affect your mortgage rate are under your control, such as your credit history and how much debt you have, while other aspects that impact mortgage rates are tied to market conditions.

To help score the lowest rate you can get, it’s important to understand how lenders determine your interest rate. That way, you can take the right steps to put yourself in a position to save money. Here’s a look at what causes mortgage rates to change.

Individual Factors Affecting Mortgage Rates

When your lender determines your mortgage rate, it assesses how much risk you pose as a borrower. In other words, they’re trying to predict how reliable you will be in repaying the loan.

Here are some of the factors you control that can affect your mortgage rate.

Credit score

Your credit score indicates how well you’ve managed your debt and how likely you are to pay bills on time. Borrowers with higher credit scores typically receive lower interest rates, while those with lower scores usually are offered higher rates.

Paying your bills on time and reducing your overall debt load are proven ways to boost your credit score. Before you apply for mortgage preapproval, it’s a good idea to review your credit report for inaccuracies that could prompt a lender to charge you a higher rate.

Down payment

While it’s possible to get a mortgage with a down payment as low as 3% of the purchase price, you likely will pay a higher interest rate. If you make a larger down payment, you can get a lower interest rate because lenders view the loan as less risky when the borrower has a greater stake in the home right off the bat. Ideally, you’d want to make a down payment of at least 20% to get the best interest rate, and to avoid paying for private mortgage insurance.

Loan-to-value ratio

Your loan-to-value ratio compares your loan amount with the appraised value of the property. The larger your down payment, the lower your LTV ratio will be. Lenders prefer a lower LTV ratio because it means you have a greater stake in the property and pose a lower risk of default. Saving for a larger down payment will get you a lower LTV ratio, and in turn, a lower interest rate.


You’re more likely to get a lower interest rate on a home that is your primary residence than on an investment property or a vacation home. That’s because lenders expect you’re more likely to keep up with your payments if you live in the home.

Market Factors That Drive Mortgage Rates

Your mortgage’s interest rate also will be affected by market conditions that are beyond your control. The following factors can cause mortgage rates to rise or fall.

Federal Reserve

The Federal Reserve is the central bank of the United States, and is in charge of setting short-term interest rates. The Fed has no direct control of mortgage rates, but when the Fed changes its rates, prime rates for mortgages follow suit.

Bonds market

The Fed also buys and sells bundles of mortgages — known as government-backed securities or bonds — on the open market. This lets the Fed pump more money into the economy and give banks more cash to lend.

When bonds are cheaper, interest rates on mortgages are higher. The inverse is true as well. When bonds are pricier, rates are lower.

Secured overnight financing rate

The secured overnight financing rate is an interest rate based on how much it costs banks to borrow money overnight. This figure is used by some lenders as a baseline to determine what interest rate to charge you for a home loan.

Constant maturity Treasury rate

The constant maturity Treasury rate is a figure that some lenders use to set the interest rate for adjustable-rate mortgages. It’s based on the average yield of different types of U.S. Treasury securities,  which are certain bills, notes, and bonds that are backed by the federal government.

How Can I Estimate My Mortgage Rate?

Your mortgage rate also will be affected by which state you live in, as lenders offer slightly different rates based on your location. The Consumer Financial Protection Bureau offers a tool to help prospective borrowers get an estimate of current average interest rates in the area. For a more concrete estimate, you can contact a lender and consider seeking preapproval for a loan.


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