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How are Mortgage Rates Determined

By Edited Jul 17, 2015 0 1

There are a couple of ways to explain how mortgage rates are determined depending on what you are asking. You could answer this question based on the interest the individual will have to pay, or based on the amounts used nationally, as set by the government. Obviously, both are very different, so I would like to offer up a brief explanation of both. This way, no matter what you're looking for, you'll get the answers. So, how are interest rates determined? Let's take a look.

The Individual:

To explain how interest rates are determined for the individual, you would look first at the individual's credit score and history. While this isn't the only factor, it is without a doubt the single most important one. Banks assume risk when they give out loans, it's just the nature of the business. Credit scores and histories are used to determine the level of risk the bank will assume by extending someone credit. A lower credit score will require higher interest to help justify the risk. How mortgage rates are determined has a lot to do with your score. If a score is too low, the loan will not be approved. While there are different requirements for different banks, generally speaking, a score of 700 of higher is considered good, and should get you a decent interest amount. If you want to know how, are mortgage rates determined for the individual, this is the most important factor. What is a good credit score?

Of course, credit history isn't the only way mortgage rates are determined. Two people can have an identical history and have different interest requirements. The amount of money the individual can put down on the loan will have an impact as well. Banks look at something called loan to value ratio, and it can impact how much you pay. Essentially, this means that the bank will only loan out a certain percentage of the actual value of the home. This is also how mortgage rates are determined. By putting more money down on the home, the bank assumes less risk, and will typically lower the interest. This is also how mortgage rates are determined.


How are interest rates determined on the national level? Inflation plays a big role. When the economy is doing very well inflation tends to go up. When inflation gets too high, rates are increased to help curb spending. This makes these types of loans less attractive, and hopefully, gets people to save some money rather than spend it. On the flip side, when the economy is doing poorly it is generally decreased to help make borrowing money seem more attractive. Think of this as supply and demand to some extent. That's essentially how mortgage rates are determined, it's very similar to supply and demand.

Somewhere in the middle:

Sometimes individual banks will lower their interest requirements and can also be a factor in how mortgage rates are determined. In fact, a national or regional chain may do this based solely on competition. It's a good way to get a leg up on the others in the industry. For other banks, they may simply not be making enough money, so they need to encourage borrowers to use them for their home loans. This falls somewhere in the middle because the fluctuation really isn't based on the feds or the individual. This is also how mortgage rates are determined.

As you can see the question, how are mortgage rates determined, really has several ways to answer. There are many factors from a national, regional, local and even individual standpoint. What size mortgage can you afford?



Jul 10, 2010 4:27pm
Great article, Jason!
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