What Drives Mortgage Interest Rates for Consumers?

Mortgage Interest Rates

Your mortgage rate affects your purchasing power on a home in the short term, and helps determine what you’ll pay every month in the long; needless to say, understanding your rate is a key part of purchasing (and owning) property here in Chicago.

However, for many homebuyers, the mechanics behind their mortgage are a mystery. So, what exactly goes into determining your mortgage interest rate? What factors drive them up or down?

This is tricky stuff! To put it simply, we can sort the biggest factors that influence your mortgage rate into two broad categories: those that are affected by the economy, and those that are determined by your unique situation as a homebuyer or owner.

How Mortgage Rates Are Impacted By the Health of the Economy

Mortgage rates aren’t set in a vacuum! In fact, they are deeply interconnected to many of the other strands of the unique, complex web that is our national economy.

So many economic factors and other investments actually affect – and are, in turn, affected by – mortgage rates that it would be fruitless to try to give a totally comprehensive overview here; frankly, we can’t spare the word count! So let’s break it down into a few manageable areas.

First, as Joel Schaub, VP of Mortgage Lending at Guaranteed Rate, explains, mortgage brokers are always monitoring the underlying bond market. Mortgage rates tend to track US Treasury bonds quite closely; in particular, Joel says that he tells clients to watch the yield of the ten-year Treasury Constant Maturity rate, which has historically been a consistent indicator of which way mortgage rates are going. As the Treasury rate rises, we can expect mortgage rates to rise, as well; when the Treasury rate falls, we can, then, expect a corresponding decline in mortgage rates for consumers.

However, as Joel warns, the bond market “does not always tell a direct story of mortgages;” he encourages consumers to “find a licensed mortgage professional and put them to work for you.”

Many industries look to Treasury bonds as indicators because they are backed by the full faith and credit of the United States government, making them a benchmark. This is a great reminder that mortgage rates also react directly to the economic health of the country overall; mortgage interest rates, for instance, are often closely connected to the federal funds interest rate, which is set by the Federal Reserve.

With this in mind, there are countless factors that affect what consumers pay for their homes and, by extension, their loans; the stock market, unemployment rate, and rate of inflation all play their part in driving the economy, and driving mortgage rates. To put it in terms that affect you, the consumer? Typically, mortgage rates rise when the economy is healthier – with a rising stock market, stable employment, and rising inflation.

Looking to explore this topic in more depth? Here are a few advanced resources that will help further illustrate the economic factors that drive mortgage rates:

How Mortgage Rates Are Affected By Your Financial Situation

So, given all of these economic factors, why doesn’t every single homebuyer lock in the same rate? In addition to the fact that rates are almost constantly in flux, it’s important to note that your unique situation as a homebuyer will affect the rate that you are able to secure.

Your lender will factor a number of personal circumstances when calculating the fairest possible rate for you, including:

Your Credit Score
How confident can your lender be that you, as the homeowner, will be reliable and responsible when it comes to paying off your loan? To make this decision, your lender will look at your financial history, of which your credit score range is a very key part. Generally, the better your credit score, the likelier it will be that you’re able to secure a lower interest rate.

Your Home
Every housing market is different, and lenders will consider the location and price of your home when it comes time to determine your rate.

Your loan amount is also tied up in this; lenders will typically charge a higher interest rate for a larger loan, as they may assess that they’re taking on more of a risk. Broadly speaking, the conventional wisdom is that the higher your down payment on the property, the lower your interest rate will be.

The Specifics of Your Loan
Not all loans are created equal! In determining your interest rate, a number of factors will come into play. First and foremost, there’s the type of loan – is it a conventional loan? An FHA? A VA? The type of loan you choose can affect your rate significantly.

Your rate will also be determined by your loan term (i.e., how long you will have to repay the loan) and the type of interest rate that you and your lender decide upon, which may be a fixed-rate (which doesn’t change over time) or an adjustable rate (which has an initial fixed period, then may go up or down, depending on the state of the market).

Generally, adjustable rates are thought to give greater flexibility, at a greater risk, so 30-year fixed-rate mortgages have become the industry standard. But, as Joel reminds us, there is still the option of refinancing your fixed-rate mortgage should the market adjust, which could have a major impact on your monthly payments. As he explains:

“A good loan officer will listen to your needs and partner with you so that you don’t have wonder what the market is doing. Should there be something that is advantageous for you when the market changes, they will be there to get it done.

I like calling a current client who I have helped previously when the market moves, and telling them that when we closed on their home the rate at the time was 4.50% and today that rate is 4.00%, so we can cover closing costs and fees should they choose to lower their rate. Clients love that kind of service.”

Our thanks to Joel Schaub for contributing his thoughts!

If you have any other questions or concerns about any step of the homebuying process, don’t hesitate to reach out to Real Group! Our team has seen it all when it comes to buying and selling in Chicago, and we’d love to set you down the right path. Drop us a line today to get the conversation started!

Joel Schaub Guaranteed Rate 
Joel Schaub
Guaranteed Rate
Vice President of Mortgage Lending 
(773) 654-2049
This email address is being protected from spambots. You need JavaScript enabled to view it.

Joel Schaub, Vice President of Mortgage Lending - NMLS #224512
NMLS ID 2611 | NMLS Consumer Access | Equal Housing Lender
Licensing Information: https://www.guaranteedrate.com/licensing 


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