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How Are Mortgage Rates Determined? A Guide To Calculating Mortgage Interest Rates

Melissa Brock4-minute read
UPDATED: May 19, 2023

When you're looking at mortgage rates online, have you ever wondered, "Who sets mortgage rates, anyway?"

This is a great question. Ultimately, you can make better decisions about how to handle your mortgage application once you know the answer to "How are mortgage rates determined?"

Let's take a look at the factors that affect mortgage rates, including the market factors and personal factors that set mortgage rates.

What Factors Are Mortgage Rates Based On?

First, what exactly are mortgage rates? Mortgage rates refer to the amount of interest a lender charges for a mortgage. They can be fixed or adjustable, meaning they can either stay the same throughout the life of the loan or they can fluctuate over time. Mortgage rates influence your mortgage payment as they’re factored into your monthly mortgage payment. The type of mortgage rate you get depends on your loan type and lender as well as your qualifications when you apply for the mortgage.

So, how is mortgage interest calculated?

Many factors affect mortgage rates. As a borrower, the only thing you can control are the personal factors that help you qualify for a mortgage. The other factors that affect mortgages strictly depend on the market.

Who Sets Mortgage Rates?

Interest rates change over time as they are influenced by current market conditions.

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Market Factors That Determine Mortgage Interest Rates

There are several market factors that will determine the current mortgage interest rates, including the Federal Reserve, the bond market, inflation and the overall economy.

The Federal Reserve

The Federal Reserve (you’ve also heard it called “the Fed”) doesn’t set interest rates, it just influences them. The Federal Reserve changes short-term interest rates – it moves the Fed rate up – usually when they need to tighten the money supply – and down based on economic cycles. The prime rate for mortgages usually changes when the Federal Reserve makes interest rate changes. Banks and lenders have to mirror the changes based on what the Federal Reserve does.

The Bond Market

The bond market affects mortgage rates as well. What exactly is the bond market?

The bond market is a financial market in which participants can issue new debt or buy and sell debt securities. Mortgage-backed securities, also called mortgage bonds, refer to mortgages sold on the bond market in bundles. When the price of mortgage bonds is high, mortgage rates decrease, and when the price is low, mortgage rates increase.


When inflation increases, mortgage interest rates typically increase to keep up with the value of the dollar. When inflation cools, mortgage interest rates tend to decrease. Higher interest rates will cost you more money when in the form of higher monthly payments as you pay back your mortgage loan.

Overall Economy

The overall current economy can affect mortgage interest rates. Good and bad economic news has an impact on the direction of mortgage rates. Good economic news – like low unemployment rates and positive economic growth – can cause mortgage rates to increase. Bad economic news – like high unemployment rates – may cause them to decrease.

Personal Factors That Determine Mortgage Interest Rates

Certain personal factors determine a borrowers individual mortgage interest rate. These are more in your control and include your credit score, loan-to-value ratio (LTV), down payment, mortgage term and occupancy.

So, how are mortgage interest rates determined with regard to these personal factors? Let’s find out.

Credit Score

Your credit score is a three-digit number that shows how well you pay back debt in recent and past history. Mortgage lenders will view a good credit score more favorably than a low credit score. A higher credit score will give you better terms on your mortgage – for example, you’ll get a lower interest rate.

Loan-To-Value Ratio

What is LTV? It’s a percentage that compares your loan amount to the appraised value of the property you want to buy. Lenders look at this information when considering you for a home loan. Your LTV requirements impact your interest rates and the size of your down payment. The lower your LTV, the lower your lender will view your risk level.

Down Payment

A down payment is a sum of money that you pay out of pocket to purchase a home. The down payment amount determines the interest rate, the type of loan you can get and the total loan costs.

Mortgage Term

Your mortgage term, also called your loan term, refers to the amount of time it takes to repay a loan. Most mortgage terms last for 15, 20 or 30 years. Your mortgage term also determines your interest rate. The shorter your term, the lower your interest rate may be since it’s often viewed as less risky to lend for a shorter period of time.

In most cases, the longer your loan term, the more you’ll pay in interest. However, the longer your loan term, the lower your monthly payments will be per month. The shorter your loan term, the less you'll likely pay in interest over time but shorter loan terms usually have higher monthly payments.


Occupancy also determines your mortgage rate. In other words, mortgage lenders want to know if the home you plan to move into will be a primary residence, second home or investment property. This will help determine your interest rate.

The Bottom Line: Mortgage Rates Are Determined Based On Many Different Factors

Current mortgage rates and the mortgage interest rate you’ll pay will depend on several different factors. The main two factors are the market and your personal contribution.

The factors out of your control include the Federal Reserve, the bond market, inflation and the overall economy. As a potential borrower, the only factors you can control include personal factors that help you qualify for a mortgage, like your credit score, LTV ratio, down payment, mortgage term and how you plan to use the home.

Knowing the ins and outs of how mortgage rates are determined can help you handle the factors you can control.

Your monthly mortgage payment is dependent on whether mortgage rates are high or low. This means that when you take out a mortgage loan, it's important to understand that a higher interest rate means that you'll pay more per month for your mortgage and over the life of your loan. On the flip side, a lower interest rate will allow you to pay less per month on your mortgage loan as well as over the life of your loan.

Your mortgage lender will ultimately decide what your interest rate will be. Check out the Rocket HomesSM Home Buyer’s Guide for more information and relevant topics about mortgages.

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Melissa Brock

Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.