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8 Important Factors That Affect Mortgage Rates

Buying a house can feel like a whirlwind of a milestone. Where are you moving to? Who is your realtor? What are the key factors that affect mortgage rates? Lucky for you, the blog you’ve landed on is going to cover that last one for you. 

Join us in a quick run-through of what we deem the eight most important factors that affect mortgage rates. 

Property Type

The type of property can play a major factor in the outcome of your mortgage rate. Whether the property you are considering is single-family, multi-family, a condo, mobile, or a co-op can determine how high or low your rate will be. 

You’ll typically see higher rates associated with condos, high rises, and multi-unit dwellings (between two to four units).

Depending on whether it is your primary residence, vacation home, or rental, the intended use of the home is also included in factors that affect mortgage rates. Investment properties tend to trend toward higher rates than owner-occupied properties.

Property Location

Location is another important factor that affects mortgage rates. 

Several variables can come into play, including living in an urban or rural area as well as the state in which the property is located. Different states have different foreclosure laws, not to mention the fact that rates sometimes vary from city to city. 

[Related: Seattle Neighborhood Guide]

Another pair of factors is mortgage default risk and early repayment risk. These terms refer to borrowers who fail to pay back their mortgages or who sell or refinance before the lender can see a profit. 

Don’t forget that regardless of whether you are purchasing in a rural or urban area, different lending institutions will have different loan rates and products. The best way to understand all of the options available to you is to discuss them with multiple lenders. 

Credit Score

First things first: your credit score is one of the biggest factors that affect your mortgage rate. Lenders use your credit score to decide whether they feel you can repay your mortgage.

Your credit score is a summary of your borrowing history. This includes any late payments, inquiries, current and past credit cards or loans, and debt-to-income ratio (DTI).

Your DTI ratio is the sum of your total monthly debt in relation to your gross monthly income. This includes the new monthly mortgage payment you’ll be accruing with your new property purchase. Having a higher DTI ratio typically makes you look riskier to the lender, thus giving you a higher interest rate in the end. 

Your credit score is an important indicator that lenders will be paying attention to. A higher credit score means you’re seen as less of a risk to lenders. You’re likely to pay your bills on time and probably don’t overextend your credit. Habits like these will help lenders who pull your credit see you as a responsible prospective borrower with a low risk of default. 

[Related: Think You Know How to Find Your Credit Score? Think Again]

The Economy

It’s no secret that a growing economy will drive up demand. Employed people have more money to spend and they want to get their hands on great mortgage rates just like the rest of us. 

At the other end of the economic spectrum, a recession with high unemployment rates can decrease the demand for mortgages, in turn driving down interest rates. 

The Federal Reserve and the housing market are additional factors that affect mortgage rates. While the Federal Reserve doesn’t directly set mortgage rates, they do set federal fund rates.  Financial institutions use Federal fund rates when lending to one another. 

The higher the federal fund rate, the more expensive it will be for institutions to borrow from each other. Sometimes you will see mortgage rates rise as a way to accommodate the rising federal fund rates.

[Related: Tips for Budgeting On How Much Home You Can Afford]


Inflation is one of the key benchmarks for measuring economic growth. That’s why mortgage lenders monitor the rate of inflation and adjust loan rates accordingly. 

Inflation erodes the purchasing power of dollars over time, causing mortgage lenders to have to maintain rates to ensure a real net profit. If the home mortgage rate is 4% and the inflation rate is 2%, the rate for a mortgage loan will be 2%. When inflation is too high, mortgage rates need to be adjusted to make up for diminished purchasing power. 

While inflation has held at low levels for decades, it could creep up due to stimulus issued by the government in 2020. It is worth noting that national mortgage rates can be hard to predict, so you should avoid getting a loan when rates are near record highs.

Down Payment

Lenders want to know that you’re willing to put down a significant amount of money on your future home. A higher down payment ultimately results in a lower interest rate and can also be helpful if you are wanting to avoid private mortgage insurance. 

If you put down less than 20 percent, your mortgage rate will go up and you’ll also need to pay for mortgage insurance. The more money you put down, the lower the interest rate. This is because lenders view borrowers with a high down payment as less risky. 

[Related: Your Seattle Down Payment Guide]

Loan Terms 

The loan term is the amount of time you have to repay the loan in full. You can choose the term of your loan to get the best rate with the best monthly payments. 

A shorter loan term typically results in lower interest rates and lower overall costs, but higher monthly payments. 

An adjustable-rate mortgage may have a lower initial interest rate than a fixed rate mortgage. However, the interest rate may increase with an adjustable-rate mortgage. 

Be sure you take time to understand your loan terms before jumping head-first into your first mortgage. 

Loan Type

There are several different types of mortgage loans, and lenders can choose which types to offer. Common types of mortgage loans include conventional, jumbo, VA, FHA, and USDA. 

These loans have different qualifications and requirements and have varying interest rates. For example, most jumbo loans will require at least a 10% down payment, while most conventional loans allow as little as 3% down. 

[Related: Expenses to Know About Before Buying a Home (Beyond the Down Payment)]

Final Thoughts 

When demand for mortgages surges, lenders may raise their prices to make up for the processing costs. When demand is flat or falls, lenders may adjust their pricing to attract business and keep the lights on. Supply and demand, inflation, economic growth, the Federal Reserves’ monetary policy, and the state of the economy and housing market are all factors that affect mortgage rates.

Are you a prospective homebuyer curious about the process of purchasing a home? Seattle Mortgage Planners can help you with anything from navigating closing costs and loan options to the best neighborhoods to move to in Seattle. 

Contact us today and let’s get started on your journey.

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