What Causes Home Mortgage Interest Rates to Fluctuate?

Home mortgage interest rates will fluctuate depending on who is applying and the status of the credit market. Both these personal and national factors go into determining an eventual rate on a mortgage. If you have a variable rate, then you will see these changes in real time. If you are seeking a new mortgage, then understanding these factors can lead to a better quote on your new loan.

Credit Score

Your credit score is determined by a mathematical formula taking into account how you have performed on previous loans and other debt obligations. When you have a good credit score, your interest rate will be better. Borrowers with good credit scores present a lower default risk to lenders. Because of this lower risk, the lender can extend funding without the promise of a high payment through high interest rates. Credit scores are determined by the amount of debt you carry, the type of debt you carry, and if you have made regular payments on that debt. The best way to raise your score for a better mortgage rate is to maintain a healthy amount of debt with a payment history that shows you meet obligations every single month. Your credit score is based on the following factors:

  • 35 % is based on payment history
  • 30% Amounts owed
  • 15% Length of credit history
  • 10% New credit
  • 10% Types of credit used

Credit Report

Your credit report goes more in depth than your credit score alone. While a score can indicate possible negative behavior, a credit report will show what that behavior is. For example, a credit history shows any late payments for at least 2 years and sometimes longer depending on the state. Your credit history also shows every loan you have opened, how large the loan was, the balances you carry on revolving lines and, most importantly, any loan modifications, defaults or successful payoffs. The more loans you have paid off on schedule, the better. The more you have prepaid, modified or defaulted on, the worse. 

National Prime Rate

The Federal Reserve sets interest rates each year to encourage financial growth and curb inflation. Interest rates typically increase in a healthy economy and decrease in a recession. These rates indicate what lenders are charging each other for loans. The lower the interest rate banks are charging banks, the lower the mortgage rate most banks will charge you. However, it is never quite that simple. The Fed lowers the rate in order to encourage lending. But, if you are a high risk borrower, you may not see the lower interest rates reflected on your mortgage rates. 

Health of Credit Markets

The health of the credit markets as a whole is a better indicator of your potential loan rates than the national prime rate. The credit market operates on a large scale to support the government, private businesses and personal households alike. When the credit market is healthy, loans are profitable for banks and consumers. Consumers are generally making payments, and their purchases, such as homes or investments, are growing in value. When credit markets are not healthy, both banks and borrowers are usually losing money on loans. The loans are more expensive for borrowers than the growth they are seeing on their investments. At the same time, even with high interest rates, the high amount of defaults cause banks to lose money.