5 Key Things That Affect Mortgage Interest Rates

Financial Institutions Await Federal Reserve Decision On Interest Rates — (Photo : Photo by Mario Tama/Getty Images) Home mortgage rates are posted outside a real estate office shortly before the Federal Reserve interest rates announcement on September 18, 2024 in Los Angeles, California. Federal Reserve Chairman Jerome Powell announced a half-point cut to benchmark interest rates in the first rate cut since the early days of the COVID pandemic.

Mortgage interest rates have changed in recent years. It hit record lows during the pandemic. Rates then soared past 8% in October 2023. The increase was partly caused by the Federal Reserve hiking its interest rates to combat inflation.

Mortgage rates have since fallen and stabilized. The benchmark 30-year fixed-term settled at 6.09% in the week ending Sept. 19. Experts forecast they will decline further. This is after the Feds cut their interest rate by half a percentage point last week.

The Fed's actions influence borrowing rates. Other factors also affect mortgage rates, including:

Inflation Trends

Inflation affects mortgage rates. Lenders hike interest rates when inflation is high. This is to compensate for the eroding value of money.

Raising their interest rates would allow them to gain a real net profit. But it would also increase mortgage rates and borrowing costs.

Labor Market Conditions

Wages rise when job growth is robust. This may increase consumer spending. It could also foster economic growth. In turn, inflation and mortgage rates go higher.

A weakening labor market could dampen inflation pressure. This would lead to lower mortgage rates. This labor market condition is marked by layoffs or stagnating wages.

Housing Market Conditions

The supply and demand dynamics also influence mortgage rates. Lenders typically tighten lending standards or raise rates when demand surges. This allows them to manage the flow of applications. Conversely, lenders lower mortgage rates when demand is sluggish.

Geopolitical Events

Unforeseen geopolitical events can mean natural disasters or political instability. These cause uncertainty in financial markets.

These events can lead to fluctuations in mortgage rates. This is because investors seek safer investments.

Credit Score

Borrowers with higher credit scores receive lower rates. Lenders consider them less risky. A good credit score means they have a history of reliable debt repayment.