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How are mortgage interest rates set

Your Mortgage Questions, Answered: How Are Rates Set?

Understanding the ins and outs of your mortgage is no small feat. With fluctuating rates, credit scores, and minimum down payments, there’s a lot to keep up with — and we know you have mortgage questions.

Then, there are interest rates. Understanding how rates are set, what causes them to change, and the effects of Federal Reserve actions can get confusing. Let’s break it down.

Mortgage Rates & The Economy

The overall state of the economy can impact interest rates and mortgage loan costs. When lenders have less money to lend, rates can increase. When the Federal Reserve wants to encourage more spending, borrowing, and economic growth, it can adjust financial policy and key rates to encourage the flow of more money and increased borrowing activity.

When economic growth is happening too quickly and there is more perceived risk in the market, rates tend to go up as the Fed tries to slow the amount of money people are borrowing.

With all of this in mind, there are still other factors that could have an impact on mortgage rate trends and available loan products when the Fed raises or lowers key rates.

Understanding Mortgage Complexities

One of the most complicated aspects of the mortgage lending industry, especially for consumers, is that different banks and mortgage lenders can offer consumers different rates. The rate that each individual gets is based on a combination of market rates and borrowers’ personal financial standing, in addition to the parameters of the specific transaction and borrowers’ terms and fees.

To answer another one of your mortgage questions: Advertised rates frequently are based on a generic scenario, like buying a single family home with 20% down, taking a loan for $300,000, having a 740 credit score, and being able to fully document employment history, income, and assets, and meeting other criteria. You should be able to click on disclosures to read what assumptions are going into the rate.

If you put less money down, have a lower credit score, don’t meet the credit history standards, are buying a condo, have a high debt-to-income ratio, take a smaller or larger loan amount, or vary from the advertised criteria outlined above, your rate will likely be different. The same goes for purchasing a second home or investment property versus a personal residence.


Mortgage rates can change daily — and even multiple times per day — based on larger economic factors. Even a one percentage point (4.5% vs. 5.5%) change in mortgage rates can make a difference of tens and even hundreds of thousands of dollars in interest paid over the life of a loan. Make sure to contact your lender quickly and get a written confirmation that your rate is locked that also notes how long it is guaranteed.

More Mortgage Questions to Keep in Mind

Many prospective borrowers have a lot of mortgage questions, and the factors that determine rates can be quite different than most borrowers might think. The economy and bond trends can both play a significant role; personal circumstances and the details of individual transactions can also play a role in the final rate you qualify for (and get).

Remember, it is generally safer to lock in while things seem stable rather than trying to gamble on fluctuating rates — especially with the large impact they can have on your mortgage and finances for decades to come.

To calculate how much house you can afford or get in touch with a Mr. Cooper mortgage professional about a home loan that’s right for you, get in touch.