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How Are Mortgage Rates Determined?

Mortgage rates are affected by credit score, loan-to-value ratio, inflation and more.

Bella Angelos
Chris Jennings
Michelle Blackford
Updated
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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 when you choose a mortgage lender.

Mortgage rate factors that you control

Lenders adjust mortgage rates depending on how risky they judge the loan to be.
A riskier loan equals a higher interest rate.
The main factors lenders use are your credit score and loan-to-value ratio. These two factors help lenders decide how risky your loan is.

Credit score

Borrowers with 780 or higher: Receive the lowest mortgage rates and have the broadest choice of loan products.
Borrowers with 700 to 739: Interest rates tend to be a little higher.
Borrowers with 640 to 699: Interest rates tend to be even higher. These borrowers might find it difficult to get high-amount jumbo loans.
Borrowers below 640: Highest interest rates and fewest options. Most of the loans available at this level are insured or guaranteed by the government.
» MORE: The credit score needed to buy a house
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Loan-to-value ratio

The loan-to-value ratio (LTV) measures the mortgage amount compared with the home's price or value. For example, if 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 LTV is 80%.
A bigger down payment gives you a smaller LTV, and a smaller down payment gives you a bigger LTV.
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.
» MORE: See your loan-to-value ratio

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Other factors

Preferred rates are typically for primary residences. 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.
» MORE: How to get the best mortgage rate

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.

Inflation

Interest rates move in response to inflation. Rising inflation is often accompanied by climbing interest rates, and declining inflation is often accompanied by falling interest rates.

Job market

Rising unemployment is generally followed by falling mortgage interest rates; job growth corresponds to higher interest rates. For example, when the COVID-19 pandemic led to stay-at-home orders in the spring of 2020, the resulting layoffs and furloughs caused a recession. Mortgage rates were already low, and they fell even further — just as one would expect to happen in a recession. As the economy recovered and those jobs came back, mortgage rates went up.

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. But mortgage rates and Fed rates move independently of each other and don't always head the same direction.
» MORE: How the Fed affects mortgage rates

Are mortgage rates the same for all lenders?

Mortgage rates vary from lender to lender because lenders have different capacities for risk and different overhead costs.
When a lender reaches its limit of loan applications its employees can process, it might keep rates slightly higher than necessary to keep from being overwhelmed. When business is slow, the lender might charge slightly lower rates to drum up business.

Shop with confidence

Because lenders' mortgage rates vary, it's smart to shop for a mortgage from several lenders. Doing so could save you thousands of dollars over the life of the loan.
Now that you understand how mortgage rates are determined, you're equipped to ask smart mortgage questions when shopping for lenders.
NerdWallet writer Isabella Angelos contributed to this story.

Mortgage loans from our partners

NBKC

on NBKC

NBKC

4.5

NerdWallet rating
Min. credit score

620

Min. down payment

3%

New American Funding

on New American Funding

New American Funding

4.0

NerdWallet rating
Min. credit score

N/A

Min. down payment

0%

GO Mortgage

on GO Mortgage

GO Mortgage

4.0

NerdWallet rating
Min. credit score

620

Min. down payment

3%

COMPARE MORE LENDERS
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