Posted on 05/25/2016

Mortgage Rates: The Who, What, When and Why of How They’re Determined

3 minute read

If you’re a homebuyer seeking a mortgage, mortgage rates will have a major impact on when you decide to buy and which lender you choose for financing your purchase. Your mortgage rate (in other words, the interest rate) affects not only the amount of interest you will pay over the life of the loan; it also can influence the amount you are approved to finance as well as the affordability of housing overall.

How are mortgage rates determined? Why do they change?

Who Determines My Mortgage Rate?

Your mortgage lender will determine if you are approved for a loan and on what terms, but the secondary market plays a significant role in the fluctuation of the rates. The secondary market is where mortgages are bought and sold.

Mortgage investors, like Fannie Mae and Freddie Mac, buy loans from mortgage lenders and sell them to Wall Street, mutual funds and other financial investors who then trade them like securities and bonds. The actions of these investors in the secondary market collectively determine the interest rate on loans like yours.

What Influences Mortgages Rates?

The Fed

The Fed—the Federal Reserve—is the central banking authority of the United States and plays a key role in the overall economy. If you follow any type of economic news, you know that the Fed reacts to economic effects caused by inflation, recession, deflation, or a growing economy. One of the Fed’s key concerns is to stabilize prices in all sectors of the economy, and one of the ways stabilization is pursued is by adjusting the supply of money circulating within the economy. Changes in the money supply have as their consequence shifts in interest rates. A larger money supply, for example, typically signals lower interest rates.


Inflation occurs when there is an upward trend in prices that decreases purchasing power. Because inflation causes a surplus of dollars and a decrease in profits, lenders must increase interest rates to preserve their returns.

Economic Growth

Indications of an improving economy include higher incomes, an increase in investment and an overall upsurge in consumer spending. As the economy improves, there is typically a greater demand for mortgages along with a decrease in supply available for loans. As a result, mortgage rates climb higher. In a downward economy, however, consumers are less likely to be searching for a mortgage, thus lowering the demand, increasing the supply and typically bringing about lower interest rates.

Your Personal Mortgage Rate

While true that the government, the housing market, the national economy and the stock market influence the rise and fall of mortgage rates, there are personal factors which cause interest rates to vary from borrower to borrower. Those variables include the amount of the down payment on a home, the borrower’s credit score and the points purchased by the borrower.

If you are interested to know current conditions regarding mortgage rates, contact one of our Compass Mortgage loan officers. For more information about home buying and financing, download our free handbook, Mortgage 101, a great resource for first-time and repeat homebuyers.