12 Market & Personal Factors That May Determine Your Mortgage Rate  

Searching for the right mortgage can feel like finding a needle in a haystack. The jargon and fluctuating rates are enough to make anyone's head spin. We're here to help break it down for you! In this article, we'll explore the factors that determine mortgage rates, providing you with insights to make confident and informed decisions. So, let's dive in and discover what factors affect your mortgage rate. 

What you will learn
How are mortgage interest rates determined? 

Lenders use a combination of market and personal factors to determine mortgage interest rates. A lender will often start by evaluating the current cost of borrowing in the economy, which is influenced by the overall economic health and monetary policy. A lender may also consider personal circumstances, including your income, credit score, down payment amount, overall debt, and the size and price of the home. The following sections will explore these factors to help you understand what influences mortgage rates.  

Market Factors That May Affect Your Mortgage Interest Rate 


1. Federal Reserve & Monetary Policy

The Federal Reserve doesn't directly set mortgage rates but indirectly affects them by controlling the federal funds rate (FFR). When the FFR goes up, it becomes more expensive for banks to borrow money, leading to higher interest rates on lines of credit, auto loans, and mortgages. 

In addition, a lender's mortgage rates can be influenced by federal 'monetary policy.' This refers to actions taken by the Federal Reserve to manage the money supply and interest rates. When the money supply increases, interest rates tend to go down; when the money supply decreases, interest rates tend to go up. 

2. Economic Conditions 
Mortgage rates will vary based on the economic outlook and current economic performance. Rates tend to rise when the economy is robust and fall when the economy is slowing down. Signs of a strong economy are fast economic growth, low unemployment rates, and higher inflation. Signs of a slow economy include rising unemployment rates, lower demand for oil, and deflation. 

3. Inflation 
Inflation is an important factor that can affect mortgage rates. When there's high inflation, it takes more dollars to buy the same amount of goods or services. When inflation goes up, mortgage rates also go up to match the value of the dollar. If inflation goes down, mortgage rates also go down. When inflation is low, mortgage rates usually remain relatively stable. 

4. The Bond Market 
Mortgages are tied to the bond market, specifically mortgage-backed securities or mortgage bonds. Mortgage-backed securities (MBS) are financial investments that represent a share in a pool of mortgage loans. These loans are bundled together and sold to investors, who receive money from the monthly mortgage payments made by borrowers. The price of MBS has an inverse relationship with mortgage rates. When the price of MBS is high, mortgage rates decrease, and when the price is low, mortgage rates increase. 

5. Housing Market Conditions 
Supply and demand, home prices, and the overall health of the housing market can also impact mortgage rates. If the number of homes being built or put on the market for resale begins to decline, the decrease in home purchases lowers the demand for mortgages. In response, lenders may lower their rates to attract potential borrowers and stimulate demand. 

6. The Secured Overnight Finance Rate 
The Secured Overnight Financing Rate (SOFR) is a key benchmark rate that reflects the cost of borrowing cash overnight, secured by U.S. Treasury securities.  Mortgage lenders often use SOFR as a reference to set their base mortgage rates. 

Fixed-rate mortgages are not affected by the SOFR, because the rate is locked in place throughout the entirety of the loan term. However, adjustable-rate mortgages may be influenced by the SOFR, depending on the type and length of the loan. If you have an adjustable-rate mortgage or are thinking of getting one, it's important to talk to a mortgage advisor to understand which benchmark interest rate will be used to adjust your interest rate. 

7. The Constant Maturity Treasury Rate 
The Constant Maturity Treasury rate (CMT rate) represents the average return of U.S. Treasury securities at different maturity dates. Lenders may utilize the CMT rate as a reference to set adjustable mortgage rates or ARMs. The CMT rate and mortgage interest rates are directly correlated, so if the CMT rate goes up, mortgage rates are likely to follow. 

Personal Factors That May Affect Your Mortgage Interest Rate 

8. Credit Score 
An individual's credit score has a significant impact on their mortgage rate. A higher credit score typically translates to a lower mortgage rate, while a lower credit score may result in a higher rate. Lenders want to feel confident that a borrower will be able to pay off the loan. When a lender sees a high credit score, they see you as a responsible borrower with a low mortgage default risk. 

9. Type of Mortgage Loan 
Variations in type, length, and mortgage loan terms can influence your interest rate. For example, lenders will often charge higher interest rates for fixed-rate mortgages because they take on the risk of interest rate changes throughout the loan term. However, ARM rates can fluctuate in either direction once the fixed period is over, so there is still potential for an ARM to increase in the future.
Government-backed loans like FHA, VA, and USDA mortgage loans may offer lower rates than a typical fixed or adjustable-rate mortgage because they are all guaranteed by the government, reducing the risk for the lender.   

Learn more about different mortgage loans here.  

10. Down Payment
Generally, lenders see a larger down payment as less risky, resulting in a lower interest rate. Conversely, a smaller down payment may lead to a higher rate. Typically, the more money a borrower is willing to invest in the home, the less likely the borrower is to default.  

11. Loan-To-Value Ratio 
The Loan-to-Value (LTV) ratio, which compares the loan amount to the home's appraised value, can affect your mortgage rate. A larger down payment reduces the LTV ratio and decreases the lender's risk, potentially resulting in a lower interest rate.  

12. Mortgage Points 
Mortgage points allow borrowers to lock down a lower interest rate by paying upfront. Each point represents 1% of the loan amount. For example, if your loan amount is $100,000, your point would be worth $1,000. This option is suitable for homeowners planning to stay in their home for an extended period. Depending on their needs, borrowers can use points for long-term fixed and adjustable-rate mortgages

How Can I Calculate my Mortgage Rate? 

As you start taking the first steps toward homeownership, it's crucial to determine your potential house payment to prepare for what's ahead. Shea Homes has a mortgage rate calculator to help estimate your monthly payment. Please keep in mind that this is only an approximation and does not include all the items that make up your monthly costs. The best way to determine your future mortgage payment is to speak with a mortgage professional. 

How to choose a Mortgage Lender 

Mortgage rates are always a moving target, influenced by various market and personal factors. It's crucial to stay informed and work with experts who can guide you through the process. Working with a new home builder and direct lender together can provide a seamless process by integrating the home-buying and financing steps, saving you valuable time and effort. Shea Mortgage, for instance, offers a wide range of loan programs tailored to fit your specific needs, making it easier to find a comfortable mortgage solution for your new home. Additionally, by working directly with the lender, you can enjoy personalized attention and guidance throughout the home-buying process, ensuring clear communication and a deep understanding of your financial goals. 

Why Choose Shea Mortgage? 

At Shea, we want you to feel confident in your home-buying decision and well-equipped for the journey ahead. We understand that you have many options when selecting a home mortgage lender, but we are confident that our team of experts stands out from the rest. Learn more about Shea Mortgage and speak with a Shea Mortgage team member today! 

Connect with Our Shea Mortgage Team 

Buyers are NOT required to use Shea Mortgage as their lender and may select any lending institution of their choosing for the purpose of securing mortgage financing and are free to decline any incentives tied to the use of Shea Mortgage. Offer is available for loans made or arranged through Shea Mortgage Inc., 29122 Rancho Viejo Rd. Suite 202; San Juan Capistrano, CA 92675 (NMLS # 40397). 1-800-540-7432. All Rights Reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates, and programs are subject to change without prior notice. All products are subject to credit and property approval. Not all products are available in all states or for all loan amounts. Other restrictions and limitations apply. AZ: Mortgage Banker License #BK 0904079, CA: CA Department of Real Estate Corporate Mortgage Loan Originator License Endorsement #01197403, CO: Mortgage Company Registration, FL: Mortgage Lender License #MLD111, ID:  Mortgage Broker/Lender License #2080040397, NC: Mortgage Lender License #L-106078,  TX: SML Mortgage Banker Registration, VA: Lender License #MC-5849, NMLS #40397, WA: Washington Consumer Loan Company License #CL-40397. For licensing information, please visit www.nmlsconsumeraccess.org. Equal Housing Opportunity.

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