The personal and market factors driving mortgage rates

Quick insights

• Mortgage rate factors are both specific to the individual and driven by complex market factors.
• Buying a home or refinancing when market rates are low may help you pay less on your home over the course of the loan.
• Improving parts of your financial profile, such as your credit score, may help you secure better rates regardless of market conditions.

When comparing mortgage options, interest rates are generally one of the most important factors. The interest rate is the amount you’ll pay on top of the principal loan amount. Decimals can affect how much your home costs you over the life of the loan. But what drives mortgage rates, and who sets them? In this article, we’ll demystify the individual and broader economic factors that affect mortgage rates in the U.S.

The basics: Why mortgage rates are important

With a home loan, each monthly payment covers two costs: principal and interest. Principal costs go directly to repay the home itself, making the home “more yours” with every dollar. The interest goes directly to the lender.

With a low interest rate, the amount paid to the lender is reduced each month and over whole loan term. Low rates needn’t be the only factor of comparison between two or more loan options, but it’s financially beneficial to shop for a better rate when possible.

What determines your mortgage rate?

The mortgage rates a lender offers you are based on aspects of your personal financial profile and economic conditions. Rates also tend to vary between lenders and types of loans. In all, rate calculations reflect a complex assessment the lender completes. They want to know how likely they are to be repaid for the amount borrowed, and how much the repayment will be worth over time.

Personal mortgage rate factors

When a lender assesses you as a candidate for a loan, they are looking for indications you can repay on schedule. Here are several factors:

• Credit score: This represents someone’s “creditworthiness,” or how capable they are of repaying loans. Someone with a high credit score is considered more likely to repay money they borrow, making this an important factor for lenders preparing a loan estimate.
• Loan-to-value ratio: The loan-to-value ratio (LTV) compares the size of the loan to the purchase price or appraised value of the property (whichever is lower). The higher percentage of the home’s value that’s borrowed instead of paid up-front, the riskier the loan is considered by the lender. As a result, the rate calculation will likely be higher.
• Loan type and term: Different types of mortgages are considered riskier than others and will have higher rates as a matter of course. For example, a jumbo loan may have a higher interest rate than a standard mortgage simply because of its nonconforming size.
• Your lender: Some lenders offer lower rates than others. This could be because they weigh information in your loan application differently, or other unseen factors of their business. Getting estimates from multiple lenders may help you find a lower rate.

Economic mortgage rate factors

Personal finances aside, there are broad economic factors that impact how mortgage rates look for everyone. The factors are often at play simultaneously:

• Inflation: The price of goods and services increases over time by a process known as inflation. Because the value of a dollar changes with time, lenders may look to offset this shift with interest rates.
• Employment rates: Low rates of unemployment are often accompanied by increased economic growth, including the purchase of homes.housing-market-predictions-newsweek-2025 This may result in interest rate adjustments by lenders.
• The Federal Reserve: The Fed can impact mortgage rates by making changes to the federal funds rate, which in turn informs the prime rate set by banks and other lenders. Setting the federal funds rate is meant to steady and regulate the market through economic ups and downs. However, lenders decide on the mortgage interest rates they offer.
• Government actions: While the government does not set mortgage rates, certain actions could influence lender behavior and indirectly affect interest rates. Examples include routine changes to policies for government-sponsored entities Fannie Mae and Freddie Mac, the 2008 Housing and Recovery Act (HERA) and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The highest mortgage rates in history

In 1981, multiple macroeconomic factors drove rates for 30-year mortgages to their peak, including high inflation through the 1970s.great-inflation-of-the-1970s  To try steadying economic activity and inflationary pressures, the Fed raised the federal funds rate, which sent the prime rate to its all-time high of 21.5%.bank-rate-prime-rate By October 9, 1981, interest rates for a 30-year mortgage had peaked at 18.63%.fred-economic-data For comparison, the average for a 30-year mortgage in 2024 was 6.85%.fred-economic-data

Planning for future mortgage rate changes

While economic turns are rarely predicted, your financial planning can help set you up for success. This can include choosing a loan with the terms that work for you, paying attention to trends and careful budgeting.

Fixed rate vs. adjustable-rate mortgages (ARMs)

When comparing mortgages for their rate-related features, understanding the distinction between fixed-rate and adjustable-rate mortgages is key:

• Fixed rate mortgages keep the same rate throughout the lifetime of the loan.
• ARMs start with a fixed rate for a set period before transitioning to a rate that’s routinely updated based on market indexes.

Many homebuyers prefer the consistency and predictability of a fixed rate mortgage. Others may prefer an ARM because they plan to sell or refinance shortly after buying, or because they might expect lower rates to be available someday.

Ways to prepare for market shifts

Here’s how homebuyers could prepare to make the right decisions for them in the face of market shifts:

• Committing to one rate: A fixed-rate mortgage locks in a rate for the duration of the loan’s repayment. This might be preferable for someone who prefers consistency.
• Budgeting for rate increases: If you choose an ARM, trends and news will affect your rate. Homeowners with ARMs can plan for increases by setting aside savings or keeping a flexible budget.
• Improving one’s credit score: A higher credit score can help you qualify for a lower mortgage interest rates, despite market activity. Improving your credit score can be beneficial when you buy a home or refinance.

In summary

By now, you might see that answering “who determines mortgage rates?” is not so simple. Indeed, there are many factors that drive mortgages rates, and all are subject to change over time. Understanding how personal financial factors and the broader economic climate will affect the rates you see can help you make your best decisions. For personalized assistance with your decision-making process, consider reaching out to a Chase Home Lending Advisor.