If you’ve started looking into getting a mortgage, you’ve probably run across a lot of information about mortgage interest rates. Rates have a big impact on the actual costs of buying a home, both in terms of your monthly mortgage payment and over the long term in interest paid over the life of the loan.
The rate you’ll be offered depends on a variety of factors, including your credit score, the type of loan you choose, and whether you decide to buy points to lower your rate. Ultimately, a “good” mortgage rate is the lowest possible rate you can get at the time you want to buy or refinance your home. However, mortgage rates fluctuate daily for a variety of reasons. Here are a few of the most significant ones.
The Federal Reserve—often referred to as “the Fed”—is in charge of setting monetary policy. One of the most powerful tools the Fed has is setting key interest rates, which dictate the cost of borrowing money.
For example, when the COVID-19 pandemic hit in 2020 and began pounding the U.S. economy, the Fed decided to lower key rates to near zero to spur growth. Mortgage rates plummeted as a result, and they remained near historic lows for the better part of two years. In early 2022, the Fed started to raise interest rates, and mortgage rates quickly followed.
Besides the Fed, probably the biggest indicator of whether rates will go up or down is the economy. Almost always, mortgage rates go down when bad economic news hits, like rising unemployment, and go up on positive news, such as a healthy stock market or GDP growth. For instance, as the U.S. economy began to recover from the pandemic in late 2020, rates started trending upward.
Inflation can also play a factor on interest rates. Inflation happens when the economy is growing and the prices of goods and services increase. That also holds true for the price of money. If tomorrow’s dollars are worth less than today’s due to inflation, lenders will demand a higher price for lending it out over time to compensate them for the added risk.
10-Year Treasury Yields
Mortgage rates typically move similarly to 10-year Treasury bond yields, so when yields go up, so do mortgage rates.
To understand why this is, you need to know that most mortgages are packaged and sold as securities on Wall Street. While the vast majority of mortgages have 30-year terms, most mortgages are paid off within 10 years because borrowers refinance or sell their homes within that time frame. For this reason, Wall Street investors typically compare mortgages to 10-year Treasury bond yields.
Getting the Best Rate
Another factor that impacts what kind of rate you are offered is your DTI, or debt-to-income ratio. Your DTI is the ratio of your proposed monthly mortgage payment and all your other monthly debts compared to your total monthly income. A lower DTI means you are likely to be offered a better rate. Vice versa, a high DTI means a higher rate.
Predicting what will happen to mortgage rates in the future—especially on a month-by-month level—is practically impossible. Whether rates are going up or down, the best way to get the lowest rate available at any given moment is to make sure you have good credit by paying your bills on time.
Mortgage rates are constantly moving one way or another and can change even by the hour. If you are concerned that rates may move higher, it’s a good idea to lock in an interest rate with your lender early in the process. If rates go up, you’ll still get the same rate you were originally offered.