All About Mortgage Rates

Reading time: 6 minutes

6 minutes read

Category: Loans
Posted on: 01/09/2019
a couple signing paperwork at a desk in a mortgage broker's office

When it comes to trying to figure out mortgage rates, a lot of people feel confused. Considering the rates change periodically based on a variety of things, including the Federal Reserve, it’s no wonder. Fortunately, with the right information, you can learn the most important aspects of these rates, as well as what you need to do to secure the lowest mortgage rate when buying a house.

In simple terms, mortgage rates refer to the interest tacked on to a home loan. For the buyer, the goal is to get the lowest rate possible, which makes the monthly payments more affordable. Also, the lower the rate, the less you ultimately pay by the end of the loan.

Keep in mind that initially, most of the money you put toward the loan goes toward interest, not the principal. Therefore, the higher the rate, the longer it’ll take before your money begins to reduce the borrowed amount left on the loan.

Why Do Mortgage Rates Change?

What you may find interesting is the better the economy, the higher the rates go. This has to do with a fear of inflation, which causes fixed-income investments to depreciate. When that happens, yields tend to rise, forcing the rates on home loans to increase.

Mortgage rates change every year. Depending on the current economy and predicted outlook, the Federal Reserve modifies the United States financial system by raising or lowering the federal government funds rate, which is the interest rate that lenders charge each other for securing short-term loans.

Both inflation and movement within the market impact mortgage rates. Since it’s common to see home loans lumped in with others into securities backed by mortgages, if the cost of consumer goods increases, the U.S. dollar loses a slight amount of power. When that occurs, inflation happens, impacting how people spend. In an effort to boost the economy and strengthen the value of the dollar during a period of inflation, interest rates increase.

There are also several global factors that play a role in the increase or decrease of mortgage rates. Remember, a slow or weak economy forces the Federal Reserve to lower rates. However, a strong economy leads it to increase them as a way of helping with inflation. An increase in competition around the world, the cost of food and the rate of unemployment also help determine where the Federal Reserve sets mortgage rates.

How to Secure the Lowest Mortgage Rate

Although you have no control over what the Federal Reserve does, there are viable ways to secure the lowest mortgage rate available.

Mortgage Type

For starters, make sure you select the right type of home loan. If you want to pay your mortgage off in a relatively short amount of time, an adjustable-rate mortgage (ARM) is probably your best bet since the introductory rate is much lower than what you would get with a fixed-rate mortgage (FRM).

However, if you expect to live in your home for a long time, go with an FRM. With an FRM, the rate never changes throughout the life of the loan, while it does with an ARM.


Remember, banks, credit unions and other lending institutions all vie for your business. Therefore, each tries to outdo the other when offering mortgage rates. Shopping around will help you secure the lowest rate possible.

Down Payment

While most mortgage lenders require a minimum of a 3% down payment, if you want a lower interest rate, put down more. Lenders base the mortgage rate on the home’s loan-to-value amount. With a small down payment, they might consider lending you money somewhat risky. With a higher down payment, you lower that ratio, which leads to lenders offering you a lower rate.


Yes, there are home loans available for people with less-than-perfect credit. Yet the lower your FICO score, the higher the mortgage rate. If you want to become a homeowner, take between six months and a year to do everything you can to increase your credit score before house hunting.


Lenders also base the mortgage rate they offer on your employment history. The longer you have been with a specific company or working in the same industry, the better.


Another way to secure a low mortgage rate is by paying your lender extra points. The way this works is for every 1% of the loan value you pay extra, the interest rate lowers.


Some lenders will consider the stability of your income when setting the mortgage rate. For instance, if you can show that you work a high-demand job or for a highly successful company, the lender may offer you a lower rate.


Having money in savings makes home lenders feel more confident in your ability to make the payments and act responsibly. Prior to starting the house-hunting process, build your savings account up as much as possible.

Debt-to-Income Ratio

When determining the mortgage rate, lenders look at this ratio. In other words, if you have more debt than income, lenders consider you a risk. You never want to have more than 40% of your monthly income designated for the home loan, credit card bills, and car payments. The lower ratio you achieve, the lower the mortgage rate you secure.

Closing Date

The time it takes to close on a house ranges between 30 and 60-days in most cases. However, if you can schedule your closing within the first 30-days, there’s an excellent chance of having the mortgage rate dropped as much as half a percentage point.

Buying a house is exciting but also a significant financial investment. To keep your payments affordable and pay less on the loan, it is worth making the appropriate changes and decisions to secure a low mortgage rate. The best advice for anyone interested in buying a home is to plan ahead. Jumping in without the proper preparations increases the odds of you paying more in interest than you should. With careful planning, you can set yourself up for success - learn more in our loans guide.

Finance Guru

Finance Guru