Compare mortgage rates closing costs12/14/2023 “Credit score is a very important consideration when applying for a mortgage,” Banfield says. The lower your score, the higher the rate you’ll need to pay to compensate for the perceived risk. Mortgage lenders use this number to gauge your risk as a borrower-or how likely you are to default on your loan. Your personal finances will factor into your interest rate as well. It also increases the costs for lenders to originate loans, which drives their prices higher as well. “This is because investors are willing to accept lower returns on their investments when the prices of MBS are high.”įinally, inflation factors in, too-and not just because of the Fed reaction. “When there is high demand for mortgage-backed securities, the prices of those MBS increase, which in turn can lower mortgage interest rates,” says Tanya Blanchard, founder of mortgage brokerage Madison Chase Capital Advisors. This pushes the yields on those securities down (yields fall when bond prices rise), taking mortgage rates down with them. When there are geopolitical concerns or the economy is wavering, investors tend to flock to safer investments-which include things such as Treasury bonds and mortgage-backed securities. This is due in part to how economic conditions impact investment activity. “Interest rates often will rise or fall based on the strength of the economy, and ironically, bad news can be good news for lower interest rates,” says Bill Banfield, an executive at lender Rocket Mortgage. When the economy is strong, rates tend to be higher. The overall state of the economy is a big contributor to the path of mortgage rates. Here’s what you need to know about what determines your mortgage rate. Other external factors play a role, too-as do the details of your financial situation and loan choice. While the Fed influences mortgage rates, it is only one piece of the puzzle. The Mortgage Bankers Association, a trade group, predicts a slightly lower 5.90% average. As Hepp puts it, “Mortgage rates will continue to be a headwind to the housing market for the foreseeable future.”Īs of its July forecast, Fannie Mae projects 30-year mortgage rates will finish out the year at around 6.60%. Whether the Fed holds short-term rates at the current level or makes additional rate increases, mortgage rates will likely remain high for the rest of 2023. “The Federal Reserve will continue its aggressive rate stance for the remainder of the year,” says Selma Hepp, chief economist at data provider CoreLogic. So far, the Fed has increased the federal-funds rate 11 times, most recently in July. Since the Fed began hiking rates in March 2022, mortgage rates have jumped almost three full percentage points. When banks see higher costs, they pass those on to borrowers via higher rates. This is because the Fed’s rate determines what banks pay to borrow money. While the Fed doesn’t directly determine mortgage rates, changes to the federal-funds rate-either higher or lower-generally push mortgage rates in the same direction. Thanks to the Federal Reserve’s ongoing fight against inflation, mortgage rates have climbed over the last two years.
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