Mortgage Rates: The Who, What, When and Why of How They're Determined

Posted by Laine Smith on 5/25/16 11:02 AM

Topics: Economy

If you are a homebuyer seeking a mortgage, a big part of when you decide to buy and which lender you choose to finance with will likely depend on where mortgage rates stand. Your mortgage rate not only affects the amount of interest you will pay over the life of your loan but can also influence the amount you are approved to finance, as well as your affordability of homeownership overall.

So how are mortgage rates determined? And why do they change?


Who Determines My Mortgage Rate?

Your mortgage lender will determine if you are approved for a loan and on what terms, but the secondary market is mostly responsible for the fluctuation of mortgage rates. This secondary market is where mortgages are bought and sold.

Mortgage investors, like Fannie Mae and Freddie Mac, buy loans from mortgage lenders and sell them to Wall Street, mutual funds, and other financial investors who then trade them like securities and bonds. The actions of these secondary market financial investors collectively determine the interest rate on your loan.

What Influences Mortgages Rates?

The Fed

The Federal Reserve, aka “the Fed”, is the United States’ central banking authority and a key influential factor in the economy. If you follow any type of economic news, you know that the Fed reacts to economic events caused by inflation, recession, deflation and economic growth to stabilize prices. The Fed adjusts the supply of money circulating within the economy, swaying rates. More money supply typically means lower interest rates.

Recently, the Fed has been considering another federal funds rate hike this summer. While the Fed’s increase affects short-term interest rates on a more immediate scale, long-term rates (like mortgages) will also experience an eventual uptick.


Inflation is when there is an upward trend in prices that decreases purchasing power. Because inflation causes a surplus of dollars and decrease in profits, lenders must increase rates to preserve their returns.

Economic Growth

Indications of an improving economy include higher incomes, an increase in investments, and an overall influx of consumer spending. As the economy improves, there is typically a greater demand for mortgages and a decrease in supply of funds for loans, driving mortgage rates higher. In a downward economy, consumers are less likely in the market for a mortgage, driving down demand, increasing supply and placing downward pressure on interest rates.

Your Personal Mortgage Rate

Though the government, housing market, economy, and stock market cause mortgage rates to increase and decrease, there are personal factors that will cause interest rates to vary from borrower to borrower. This includes down payment amount, credit score, and points purchased by the borrower.

If you are interested in where mortgage rates are currently, contact one of our mortgage bankers. For more information regarding home buying and financing, download our free Mortgage 101 Handbook, a great resource for first-time and repeat homebuyers.

Download: Mortgage 101 Handbook

Get Pre-Approved

Subscribe to Email Updates