Mortgage rates play one of the most consequential roles in home buying—but how are they determined? Typically, a homebuyer’s mortgage rate is determined by several factors including credit, loan type, and “economic and market conditions,” according to CNN.
Economic Factors
One of those economic factors is the Federal Reserve’s interest rates, which have spiked since the start of the pandemic. The Fed’s interest rate doesn’t directly influence mortgage rates, though, rather it influences a bank’s ability to borrow money.
Mortgage rates are also correlated with the 10-year Treasury yield. Home loans are bundled and sold on the bond market, competing with the Treasury bonds. The bundled loans, then, have to offer competitive yields, driving mortgage prices up or down depending on the 10-year Treasury yield.
The economy can drive mortgage rates up or down, too. “When the economy is strong, rates tend to be higher,” the Wall Street Journal explained. High demand for mortgage-backed securities, or mortgage loans that have been packaged as an investment, typically comes during times of economic uncertainty. This demand “pushes the yields on those securities down…taking mortgage rates down with them,” according to the Wall Street Journal.
Personal Factors
In addition to economic factors, a homebuyer’s credit score factors into the mortgage rate. According to CNN Money “With a higher credit score, you are seen as a less risky borrower and thus are offered a lower rate.”
Down payment is a key factor, too. The larger the down payment, the more investment the buyer makes, which in turn “means you have more to lose, which hopefully discourages you from defaulting,” according to the Wall Street Journal.
Types of Loans
Most buyers will choose between two types of mortgages – 15-year fixed, and 30-year fixed. The 15-year fixed loan typically has a lower interest rate than the 30-year fixed due to lower risk and borrowing costs. The downside of a 15-year loan is a higher monthly payment.
There are also governmental loans like Federal Housing Authority and Veterans Affairs loans which typically have lower rates.
For more information on the housing market, check out Drew Mariani’s conversation here.
