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Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories.
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But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
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SHARE: Cindy Robinson/Getty Images March 22, 2022 Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal. Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
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At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners.
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Here's an explanation for how we make money. Bankrate logo
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices.
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We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy.
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Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo
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We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
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The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service.
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We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site.
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While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. moved dramatically throughout the pandemic.
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In the early phase of the health crisis, mortgage rates plunged to record lows. During the recovery stage, they hit pre-pandemic levels, then kept rising.
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But why have rates moved so dramatically? And what drives mortgage rate movements? The answers are complex, but the moves make more sense when you learn which factors drive mortgage rates — and which don’t.
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Here’s a quick crash course that could save you money on a new mortgage or a refinance.
1 It sort of begins with the Federal Reserve
The , but the central bank’s decisions definitely influence mortgage rates.
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As the coronavirus pandemic hammered the U.S. economy in 2020, the Fed said it would keep rates near zero for the foreseeable future — and mortgage rates plunged. As the Fed began hiking rates in 2022, mortgage rates rose in anticipation of those moves from the central bank.
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The Fed’s rate decisions typically drive shorter-term products, like credit cards or home equity lines of credit, says Greg McBride, CFA, Bankrate’s chief financial analyst. Meanwhile, mortgage rates move based on longer-term interest rates. “It’s the longer-term outlook for economic growth and inflation that have the greatest bearing on the level and direction of mortgage rates,” McBride says.
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“Because mortgages are packaged together into securities and sold as mortgage bonds, it’s the return investors demand to buy these bonds that dictates the general level of mortgage rates.” Mortgage rate levels are priced above that of the , considered by investors to be a risk-free investment. The spread in pricing between mortgage rates and the 10-year Treasury reflects the risk that investors bear for holding those bonds, McBride adds.
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“It may seem counterintuitive that 30-year mortgage rates are priced relative to yields on 10-year Treasuries,” McBride says, “but when these 30-year mortgages are packaged together into bonds, on average, they tend to pay out over a 10-year period as homeowners refinance, move or otherwise pay off their loans early.”
2 Economic conditions play a role
What happens in the economy, and how those events affect investors’ confidence, influences mortgage pricing. Good and bad economic news have an inverse impact on the direction of mortgage rates.
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“Bad economic news is often good news for mortgage rates,” McBride says. “When concern about the economy is high, investors gravitate toward safe-haven investments like Treasury bonds and mortgage bonds, pushing bond prices higher but the yields on those bonds lower.” Good economic news — increases in consumer confidence and spending, robust GDP growth and a solid stock market — tend to push mortgage rates higher.
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That’s because the higher demand means more work for lenders who only have so much money to lend and manpower to originate loans, says Jerry Selitto, president of Better.com, an online mortgage lender. This effect was on full display in late 2021 and early 2022 — with job growth strong and the economy in recovery, mortgage rates spiked.
3 Inflation the long-forgotten foe
Inflation is the increase in the pricing of goods and services over time, and it’s an important benchmark when measuring economic growth.
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Rising inflation limits consumers’ purchasing power, and that’s a consideration lenders make when setting mortgage rates. Lenders have to adjust mortgage rates to a level that makes up for eroded purchasing power when inflation rises too quickly.
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After all, lenders still need to make a profit on the loans they originate, and that becomes more difficult when consumers’ buying power is diminished. Likewise, inflation is a consideration investors make in the prices they’re willing to pay, and the returns they demand, on mortgages and other bonds they purchase on the secondary market.
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While inflation held at low levels for decades, . Inflation has spiked to its highest level in four decades, hitting 7.9 percent in February 2022.
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That leads back to the first item on our list — soaring prices have forced the Fed to clamp down by raising rates.
4 Your financial and credit picture
The first three items on the list are all about the broader economy. This factor focuses on you and your creditworthiness.
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Lenders want to feel confident that you can and will repay your mortgage, and they do that by . Your credit score is the most crucial indicator of your ability to manage debt and pay bills on time. Borrowers with lower credit scores pay higher interest rates and have more-limited loan options if their credit is less than stellar.
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Lenders also pay close attention to your debt-to-income, or . Your DTI ratio is the sum of all of your monthly debts (including the new monthly mortgage payment) in relation to your gross monthly income. Generally, the higher your DTI ratio, the riskier you appear (on paper) to a lender — and the higher your interest rate will be.
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As a general rule of thumb, conventional lenders want to see your DTI ratio stay below 43 percent, but some loan programs will consider borrowers with a DTI ratio as high as 50 percent. As mortgage rates fall, your DTI ratio falls, too, because a lower rate will drop your monthly mortgage payment, which is included in your DTI ratio calculation.
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As a result, you could afford to buy more house, Selitto says.
5 Origination costs so lenders can keep the lights on
The final item on our list is not about the economy or the borrower but about lenders’ bottom lines.
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The cost of includes tasks such as running a credit check, underwriting, a title search and the many other steps a lender must take to process a loan. Tighter lending regulations implemented after the 2008 housing crash have cut into lenders’ profits as they’ve changed their systems to comply with new regulations, Selitto says.
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That’s pushed the cost of originating mortgages higher. In the fourth quarter of 2021, the cost to originate a mortgage rose to $9,470 per loan, up from $9,140 per loan the previous quarter, according to the Mortgage Bankers Association.
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That’s a steep increase from average production costs of $6,758 per loan lenders averaged from 2008 through 2021. “In setting prices, lenders have to look at the cost of origination and decide what margins they want above those costs,” Selitto says.
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“The more efficient a manufacturer of mortgages can be, the more competitive they are on pricing.”
Bottom line
When demand for mortgages surges, lenders may have to account for the spike in — and the processing costs involved — by hiking mortgage pricing. Likewise, when demand is flat or falls, lenders have to adjust pricing to attract business and keep the lights on, Selitto says.
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Mortgage rates are always a moving target. They change hourly, daily and weekly, and are difficult to time perfectly. If you’re weighing a home purchase or refinance, it’s a good idea to shop with multiple lenders to compare mortgage rates and find out when you should lock in your loan.
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Learn more
SHARE: Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in 2020, he wrote about real estate and the economy for the Palm Beach Post and the South Florida Business Journal.
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Suzanne De Vita is the mortgage editor for Bankrate, focusing on mortgage and real estate topics for homebuyers, homeowners, investors and renters.
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