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How Are Mortgage Rates Determined?

Updated: Sep 21, 2023

There are multiple factors that determine your eligibility for a mortgage. Lenders will look a variety of qualifying factors including:

● Household income

● Property type you are purchasing (e.g., primary residence)

● Assets

● Credit score

● Size of down payment

● Debt-to-income ratio


After a careful review of your financial history, your lender will offer you a rate. But where does the rate come from? Mortgage rates are affected by the overall economy: economy good →rates go up; economy bad → rates go down.

The Federal Reserve also affects interest rates. It determines rates for banks to borrow money to lend to customers. It manages short term interest rates (Federal Funds Rate) to control the money supply and thus the direction of the economy. Although the Fed doesn’t control (long term) mortgage rates, mortgage rates usually follow the same pattern as the Fed in the sense that in a normal economy, long term rates should be higher than short term rates. To understand why this is the case, imagine how much you would charge if you were to give your money to someone for one year. Now consider giving your money away for 30 years. The longer you had to ‘tie your money up’ the higher rate of return you’d need to justify lending the money.

It’s important to understand that Fed rate hikes are factored into mortgage rates by the market when announced, not when implemented. For example, mortgage rates shot upward last year when the Fed announced several rate increases that began last year and will continue into mid- to late 2023. The market digests these announcements immediately. Most times when the Fed actually increases the Federal Funds Rate, mortgage rates stay flat or even improve so listen carefully to those scary news reports about another round of Fed rate hikes because it is not likely to affect your mortgage rate going forward as long as they’re just doing what they told us they would do last year or last month.

Mortgage rates are also tied to the Treasury bond market. When Treasury bond prices are high, mortgage rates are lower and vice versa. Mortgage rates also follow inflation - when inflation is high, interest rates increase to keep up with the value of the dollar. Conversely, if inflation decreases, interest rates drop. This one factor will almost certainly be the biggest driver of mortgage rates this year. Look for CPI (consumer price index) data each month to see quickly how mortgage rates will behave.

Other factors can affect mortgage rates, this is just a high-level overview. For more information contact:


Mike Blasius, Carnegie Mortgage

cell: 201-310-5892


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