How Are Mortgage Rates Determined?

Mortgage rates are determined based on your credit score, down payment and loan term — but you’re not the only cook in that kitchen. Economic uncertainty or a lender’s business plans may add a dash of unexpected flavor to your recipe, making your interest rate hard to predict. Understanding how everything blends together can help you find a mortgage rate that suits your financial needs.

What factors determine your mortgage interest rate?

Lenders consider two major factors when determining your mortgage rate:

1. How likely you are to repay the loan. Higher risk of default means a higher interest rate.
2. What’s going on in financial markets and the larger economy. Higher national benchmark interest rates means lenders start calculating rate offers from a higher baseline.

The first factor — your ability to repay the loan — is based on your overall financial picture: your credit score, savings, total debt and income. Higher credit scores and low debt typically unlock access to the lowest mortgage interest rates.

The economy’s overall performance, inflation and the Federal Reserve’s monetary policy — in other words, things that are out of your control — influence the second factor. Financial markets and economic indicators constantly fluctuate, making it even more important for you to focus on keeping your finances in great shape.

Mortgage rates today

Factors you can control: Your financial choices

1. Credit score

Mortgage lenders rely heavily on your credit score to determine your rate. To boost your credit score, pay your debt on time, keep revolving (credit card) debt balances low and avoid opening multiple credit accounts at once.

Tip

You’ll need at least a 780 credit score to get the best conventional mortgage rates.

2. Down payment and LTV ratio

Your down payment has the second largest effect on your mortgage rate, especially if you’re taking out a conventional loan. The more money you put down, the easier it is to quickly pay off your loan balance if you have to sell your home later. Because that makes you less of a risk to lenders, they’ll typically offer you lower rates.

If you’re refinancing your mortgage, you may hear the term “loan-to-value (LTV) ratio.” Your LTV ratio represents how much of your home’s value you’re borrowing. For example, if you borrow $300,000 on a home worth $375,000, your LTV ratio is 80%. In general, the lower your LTV ratio, the lower your mortgage rate will be.

3. Loan term

Your loan term is the number of years it takes for you to pay off your loan. A shorter-term loan builds equity faster and allows you to pay off your mortgage quicker, both factors that lead to a better rate on a 15-year mortgage than a 30-year mortgage.

 Learn more about comparing 15-year versus 30-year mortgages.

4. Fixed rate vs. adjustable rate

An adjustable-rate mortgage (ARM) comes with an interest rate that adjusts at specific intervals, allowing it to move up or down with the market. That means payments that fluctuate as well, so it’s important to know what your maximum monthly payment could be before you choose an ARM.

5. Other factors

Your lender may also adjust their interest rate offers based on the type of home and loan you need. You’re likely to see lower rates if you purchase a single-family home instead of a condominium or manufactured home.

Lenders may also offer special rates or closing cost discounts if you’re buying a home, especially if you’re a first-time homebuyer.

If you’re refinancing your current loan to reduce your mortgage rate or loan term, you’ll get the best refinance rates. Meanwhile, tapping equity with a cash-out refinance usually comes with a significantly higher rate if you’re applying for a conventional loan.

 See refinance rates today.

Is a 7% mortgage rate high?

Yes and no. A 7% mortgage rate is considered high compared to recent historical averages, especially considering that 30-year rates averaged 3% over the course of 2020 and 2021. That said, it’s not especially high when looking at longer timeframes. In fact, it’s slightly below average if we’re looking at the last 50 years.

National average mortgage rates today

Average rates disclaimer Current average rates are calculated using all conditional loan offers presented to consumers nationwide by LendingTree’s network partners over the past seven days for each combination of loan program, loan term and loan amount. Rates and other loan terms are subject to lender approval and not guaranteed. Not all consumers may qualify. See LendingTree’s Terms of Use for more details.

Factors you can’t control: Economic events and financial markets

1. Inflation

 As inflation rises, mortgage rates tend to follow.

Inflation measures how much the costs for goods and services increase over a specific time period. You may see inflation in the form of higher grocery prices, and the rising cost to put gas in your car or purchase a house. Inflation often leads to increases in the federal funds rate (the target rate banks use to lend to each other), which is bad for mortgage rates.

2. The Federal Reserve

  When the Fed cuts the federal funds rate, mortgage rates tend to follow.

The Federal Reserve is the central bank of the United States and its primary purpose is to keep the economy stable by creating policies that help the economy run smoothly. If inflation rises too fast, goods and services become more expensive for both consumers and businesses.

One strategy the Fed uses to combat inflation is to increase the federal funds rate to cool off the economy and reduce inflationary pressure. Lenders generally pass those increases on to consumers in the form of higher rates for all types of loans, including mortgages. On the other hand, the Fed may choose to lower the federal funds rate in order to stimulate economic growth, since a cut makes it easier (that is, cheaper) for people to borrow money.

3. The job market

  As the job market slows and unemployment rises, mortgage rates tend to drop.

A strong job market, on the other hand, is usually bad news for interest rates because it often leads to inflation, which lifts mortgage rates. Investors often gauge the job market using the “nonfarm payroll” report — commonly known as the jobs report — because it gives a monthly view into job growth in the United States.

4. Mortgage lenders

As with all businesses, mortgage companies set their own prices to execute a business model that makes them money. That’s why you should shop with at least three to five lenders to find your best rate. You won’t know which lender is the best fit for you unless you’ve reviewed loan estimates from several different companies.

How much would a $70,000 mortgage cost per month?

In the current rates environment, a 30-year fixed mortgage for $70,000 would cost about $460 a month.

Read more about how to find small mortgage loans.

How to get the best mortgage rates

To get the best rate, focus on making sure your personal finances are as solid as possible — a stellar credit score and a large down payment on a single-family home will make you a top candidate.

But there’s a catch: You still need to shop around.

LendingTree research shows that borrowers who do the extra comparison legwork win the best rates — and the prize is a lower monthly payment and thousands of dollars of interest savings over your loan’s lifetime.