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What factors determine mortgage rates?

Your mortgage rate is determined by many factors. Some are within your control and some aren’t. With awareness of these factors, you can feel more confident about getting a competitive interest rate.

Mortgage rate factors that you control

Lenders adjust mortgage rates depending on how risky they judge the loan to be. A riskier loan has a higher interest rate.

When judging risk, the lender considers how likely you are to fall behind on payments (or stop making payments altogether), and how much money the lender could lose if the loan goes bad. The major factors are credit score and loan-to-value ratio.

Credit score

The lowest mortgage rates go to borrowers with credit scores of 740 or higher. These borrowers have the broadest choice of loan products.

“The lowest rates go to borrowers with credit scores of 740 or higher.”

Interest rates tend to be a little higher for borrowers with credit scores of 700 to 739. For borrowers with credit scores from 620 to 699, mortgage rates are even higher. These borrowers might find it difficult or impossible to get high-amount jumbo loans.

With a credit score below 620, the interest rates are even higher, and options are fewer. Most of the loans available at this level are insured or guaranteed by the government.

Loan-to-value ratio

The loan-to-value ratio measures the mortgage amount compared with the home’s price or value. Let’s say you make a $20,000 down payment on a $100,000 house. The mortgage will be $80,000. You’re borrowing 80% of the home’s value, so your loan-to-value ratio is 80%.

A bigger down payment gives you a smaller loan-to-value ratio, and a smaller down payment gives you a bigger loan-to-value ratio.

If your loan-to-value ratio is greater than 80%, it’s considered high, and it puts the lender at greater risk. This may result in a higher mortgage rate, especially when combined with a lower credit score. The loan will usually require mortgage insurance, too.

Other factors

Lenders may charge more for cash-out refinances, adjustable-rate mortgages and loans on manufactured homes, condominiums, second homes and investment properties because those loans are deemed riskier.

Mortgage rate factors beyond your control

The overall level of mortgage rates is set by market forces. Mortgage rates move up and down daily, based on the current and expected rates of inflation, unemployment and other economic indicators.

Overall economy

Mortgage rates tend to rise when the outlook is for fast economic growth, higher inflation and a low unemployment rate. Mortgage rates tend to fall when the economy is slowing down, inflation is falling and the unemployment rate is rising


Rising inflation is often accompanied by rising interest rates, because when prices go up, the dollar loses buying power. Lenders demand higher interest rates as compensation.

“The level of mortgage rates is set by market forces.”

Low inflation over the past 10 years has contributed to low mortgage rates. The 30-year fixed-rate mortgage has lingered below 5% for most of the past decade, a historically low level. In Freddie Mac’s weekly survey, the 30-year fixed rate averaged 3.92% in the 10 years ending January 2021; it averaged 5.94% in the 10 years ending January 2011.

Job growth

When the Pandemic Covid-19 led to stay-at-home orders in the spring of 2020, the resulting layoffs and furloughs caused a recession. Mortgage rates already were low, and they fell even further — just as one would expect to happen in a recession.

Other economic indicators

Mortgage investors pay attention to many economic trends besides inflation and employment — including retail sales, home sales, housing starts, corporate earnings and stock prices.

Federal Reserve

The Federal Reserve doesn’t set mortgage rates. The Fed raises and cuts short-term interest rates in reaction to broad movements in the economy. Mortgage rates rise and fall according to those same economic forces. Mortgage rates and Fed rates move independently of each other, but usually in the same direction.

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