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  • Writer's pictureNorthPort Funding

These Are The 9 Factors That Determine Mortgage Rates

Updated: Jun 26, 2023

You should be informed as you browse your options for a mortgage loan. Understanding why mortgage rates change is key to figuring out how to get the best possible rate.

We’ve made a rundown of 9 factors that affect mortgage rates, so you can be prepared when you meet with a lender.

But first, what’s a mortgage rate anyway?

What are mortgage rates?

A mortgage rate is the interest amount that’s charged on a mortgage loan. Thus, your mortgage rate is synonymous with your interest rate in the housing market. For this reason, we’ll use these two phrases interchangeably throughout this article.

What affects mortgage rates?

There’s a host of factors that affect mortgage rates. Some are within the scope of your control, and some aren’t.

Outside forces that drive interest rates are determined in the financial market. These include the federal reserve, the bond market, economic status, and inflation. Sometimes they can also include special circumstances, like the unprecedented Covid-19 pandemic.

Personal components that influence your interest rate are the qualifying factors a lender looks at when you apply for a home loan. These include your credit score, down payment amount, loan type, and your lender’s judgment.

First, we’ll go over the market forces that influence interest rates. While these forces exceed the limits of our control, they’re critical to understand when you take out a loan.

1. The Fed

The Fed, also known as the Federal Reserve, is our nation’s central banking system. Its job is to guide the economy with two primary goals in mind: Keeping inflation at bay and promoting employment growth.

Because the Fed can heavily influence the direction of our economy, it has power over monetary policy and mortgage rates. Now, the Fed cannot set our mortgage rates. But, the decisions it makes for our economy can make our mortgage rates hike or fall. So, while it’s true that interest rates and the nation’s central bank move independently, they typically move in the same direction. This is because when the Fed raises or lowers the federal funds rate, it creates a domino effect. As a result, we get higher or lower interest rates on our home loans.

2. The Bond Market

To the homeowner, a mortgage is a ticket to securing their home. To the investor, a mortgage is a bond that can be traded.

Like many financial products, mortgages are traded between investors. Investors make their decisions on which bonds to buy based on the assumed risk and rate of return. This is why investor demand for mortgage bonds is a factor that affects mortgage rates. Thus, the bond market and mortgage rates have a pretty close relationship.

So, what are the bond market conditions that make mortgage rates in the housing market rise or fall?

How it can spike interest rates

When investors predict prosperous times, they move their money away from bonds and into stocks. This will give them the chance at a higher return. As a result, interest rates on home loans will spike to entice investors to buy the bond.

How it can cool interest rates

Money often gets pushed back into bonds when investors foresee an economic downturn. So, as investor demand increases, it makes interest rates decrease. That may sound contradictory, but the rate on mortgage bonds doesn’t have to be that high to attract investors. This is why rates can cool when investor demand is high.

As investors in the bond market influence interest rates, the economy influences investors. So, let’s discuss how the economy is a factor that affects mortgage rates.

3. The Economy

Interest rates on your home loan rise during an economic growth and fall during an economic decline.

This is because borrowers can afford more when the economy is booming due to low unemployment rates and high spending. So, rising interest rates will result. On the other hand, when the economy is falling, unemployment rates increase. As a result, interest rates will cool to make home loans more affordable.

Mortgage Rates and GDP

We now know how the economy can influence our home loan interest rates. But, how can we tell what the state of the economy is? The answer lies within three letters: GDP.

GDP stands for gross domestic product. It’s the total value of goods and services that are produced in a country each year. In other words, it’s the tool we use to measure the health of our economy.

A rising GDP results in a strong economy, while a falling GDP indicates a shrinking economy. Thus, our GDP can affect our interest rates.

4. Inflation

While the gross domestic product measures the value of goods and services, inflation deals with the pricing of goods and services. Inflation is defined as the increase in the cost of goods and services that happens over time. So, how is inflation a factor that affects mortgage rates?

Typically, when inflation goes up, so do interest rates. This is because an increase in prices means the dollar loses buying power. Thus, lenders will set higher interest rates on home loans to compensate.

5. Extenuating forces

Sometimes, there are special circumstances that trump other factors that affect mortgage rates. A relevant example is the Covid-19 pandemic – an unforeseeable natural disaster.

For example, in March of 2020, the Fed cut interest rates as a way to stimulate the economy. As a result, mortgage rates fell to extremely low levels.

The factors we’ve gone over thus far are outside forces we can’t control. So, let’s go over the factors we do have control over when it comes to shopping for the best mortgage.

6. Your Credit

Your credit history is a critical indicator of the interest rate your home loan will have. A good credit score shows lenders that you can pay bills on time, while a poorer score shows overdue payments and ill-managed debt. So, borrowers with higher credit scores will most likely receive lower interest rates.

7. Your Down Payment

Did you know your down payment is a factor that affects mortgage rates? The more money you put on a down payment, the greater chance you have of getting a low interest rate. This is because a greater down payment tells the lender that you’re less likely to default on your loan.

8. Your Loan Type

Interest rates can drastically change based on what loan you take out for your home. The length of your loan term and type of interest rate can cause mortgage rates to rise, depending on what you choose.

Let’s dig a little deeper.

Term Length

The duration of your loan is the time you have to pay the loan back. When a lender can get their money back in 15 years versus 30 years, they’ll reward the borrower with a lower interest rate. So, this is how the term length of a loan is a factor that affects mortgage rates.

Fixed vs. Adjustable

There are two basic types of mortgage rates: Fixed and Adjustable. A fixed interest rate won’t change over time or be affected by inflation. But, fixed rates are typically a little higher than adjustable ones.

So, while an adjustable interest rate may start lower than a fixed rate, it can increase later in your term.

9. Your Lender

There’s one more important factor that affects mortgage rates that you have some control over– it’s the person who lends you the money. Lenders use your qualifying factors to set an appropriate interest rate for your loan.

Find the best mortgage rate

At NorthPort Funding, we’re experts on the factors that affect mortgage rates. So, we’ll tailor your mortgage to fit your specific situation and needs. Contact us today to find the home loan that will give you the lowest mortgage interest rate!


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