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How are mortgage rates determined?

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

How your particular mortgage rate is determined isn’t too tough to understand. Banks take multiple factors into consideration when customizing a mortgage offer for you. Borrowers with high credit scores and those who come up with a larger percentage of the purchase price as a down payment will pay lower interest rates since banks see them as less likely to default.

The interest rate on mortgages for investment properties or second homes is generally higher than mortgages for primary residences. Those who buy mortgage points — essentially pre-paid interest — will also be able to whittle down the interest rate on their mortgage. If you need a jumbo loan, a loan of over $424,000 or $626,00, depending on how expensive real estate is where you live, you may be charged a higher interest rate, since jumbo loans are tougher than smaller, so called conforming loans, for banks to group together and package as mortgage backed securities for resale to investors.

What makes overall mortgage rates go up or down nationally directly relates to those mortgage backed securities. Mortgage backed securities happen to attract similar investors who buy 10 year treasury bonds from the government. Since bonds are considered a safe investment when the stock market isn’t doing well, more investors flock to buy them, and this demand drives down their yield, or what bond issuers promise to pay those who buy them. Mortgage rates track these treasury bond yields.

In simple terms, if the economy is doing well (and folks are investing more in the stock market than bonds) mortgage rates will rise, and when economic news is more negative, and investors are putting more money into bonds, mortgage rates will fall.

Last Updated March 6, 2018

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