How are mortgage rates determined? Why everyone gets different rates

  • Mortgage rates are determined by a mix of factors you can’t control and factors you can control.
  • The stronger the US economy, the higher mortgage rates are across the board.
  • Lenders will offer you a lower rate if you have a good credit rating or a high down payment.
  • See Insider Picks For The Best Mortgage Lenders »

There are several factors that affect the interest rate you will pay on a mortgage. Some are beyond your control and while you can’t change them you can figure them out, so you’ll be willing to pay high or low interest rate.

Other factors are in your control and you can take steps to get the mortgage rate as low as possible.

1. The economy

Mortgage rates tend to be higher when the economy is in good shape and lower when it is in bad shape. For example, rates fell in 2020 in response to COVID-19, as the pandemic hurt the U.S. economy.

The two main economic factors that affect mortgage rates are employment and inflation. When employment numbers and inflation go up, mortgage rates tend to go up.

However, employment and inflation have to be strong for months for mortgage rates to rise. For example, inflation skyrocketed in April 2021, but rates did not respond because it was a temporary surge.

2. Federal funds rate

The federal funds rate is the interest rate charged by banks when they lend to each other, and it is set by the

Federal Reserve
. The Fed rate affects rates on credit cards, loans, savings accounts, and mortgages.

The federal funds rate does not affect mortgage rates as strongly as, for example, a car loan or a CD rate. But the federal funds rate has some influence, and it can indicate how the economy is doing overall – the higher the rate, the better the economy. Keeping an eye on the Fed rate can therefore give you an idea of ​​where mortgage rates will go.

Right now, the federal funds rate is at its lowest, as are mortgage rates.

1. Credit score

Your credit score is a number representing how risky you are as a borrower. A higher credit score indicates that you are likely to pay off a loan, because you are paying your bills on time and have already borrowed (and paid off) money.

Credit scores range from 300 to 850. Here’s how the scores break down, depending on the FICO model:

  • Poor: 300 – 579
  • Fair: 580 – 669
  • Good: 670 – 739
  • Very good: 740 – 799
  • Excellent: 800 – 850

There probably won’t be much (or no) difference in your rate if you increase your score from 710 to 720, for example. But a lender will likely give you a better rate if your score goes from fair to good, or from good to very good.

2. Debt-to-income ratio

Your debt ratio is the amount you pay for your debt each month divided by your gross monthly income. You are about to take on more debt by getting a mortgage, and if it results in huge debt that makes it difficult for you to make payments, the lender will consider you a riskier borrower and charge you a higher rate. Student.

The lower your DTI ratio, the better. The minimum DTI ratio depends on the lender and the type of mortgage you get, but it typically ranges from 36% to 50%. If your ratio is even lower than the lender’s minimum, you might get a better interest rate.

3. Amount of the deposit

The minimum down payment you’ll need depends on the type of mortgage you get. It ranges from 0% for a VA or USDA mortgage to 20% or more for a jumbo mortgage.

If you can put more than the minimum, the lender will likely reward you with a better rate.

For example, a lender’s minimum down payment for a compliant mortgage might be 3%. Your rate will likely go down if you have 10% less, and even more if you are 20% less.

4. Type of mortgage

Your interest rate depends on the type of mortgage you get. Here’s what you can expect:

  • Compliant Mortgage: This is what you probably think of as a “regular mortgage”. Compliant mortgages are generally low at this time.
  • Jumbo mortgage: You get a jumbo mortgage when you need to borrow a large amount of money, or at least $ 548,250 in most areas of the United States. Jumbo mortgages generally have higher rates than compliant mortgages.
  • Government Guaranteed Mortgages: Home loans through the FHA, VA, and USDA have the lowest rates for those who qualify. These mortgages are guaranteed by federal agencies, which will indemnify your lender in the event of default. Government guaranteed mortgages are the least risky for lenders, so they have the lowest rates.

5. Term of mortgage

The shorter the term of your mortgage, the lower your rate should be. For example, a 15-year compliant mortgage has a lower rate than a 30-year compliant mortgage.

Keep in mind that shorter terms lead to higher monthly payments because you are paying off the same loan principal in a shorter time frame. But you’ll pay a lower rate and save money in the long run.

Work on factors you can control

You cannot control whether the economy is struggling or booming. Among the factors that you can technically control, not all will be within your grasp. For example, you might not be willing to get a shorter mortgage with a lower rate because the resulting monthly payments would be too high for your budget.

But maybe you can pay off some credit card debt. This would both lower your debt-to-debt ratio and likely increase your credit score, which would help you get a lower rate.

Shop for Lenders

Each mortgage lender will charge you a different mortgage rate, so comparing lenders will help you get the best deal.

You can apply for prequalification from multiple lenders to compare rates. When you apply for prequalification, a lender looks at your finances and gives you a general idea of ​​what you’ll pay.

You can also seek pre-approval from lenders if you know you want to buy soon. This is a more formal process that requires a rigorous credit investigation, but it shows you the exact rate charged by a lender. It will also block your rate, typically for 60-90 days.

Mortgage and refinancing rates by state

Check the latest rates in your state at the links below.

New Hampshire
New Jersey
New Mexico
new York
North Carolina
North Dakota
Rhode Island
Caroline from the south
South Dakota
Washington DC
West Virginia

About the Author

Laura Grace Tarpley is a writer at Personal Finance Insider, which covers mortgages, refinancing, and loans. She is also a certified personal finance educator (CEPF). In her five years of covering personal finance, she has written extensively on how to navigate loans.

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