Unless you’re looking to buy or refinance a home, you likely don’t know much about how the mortgage rates are determined. In reality, though, this is a simple combination of market factors (such as the economy) and personal factors (such as your credit score). Read on for a list of key examples of important market and personal factors.

Market Factors

Market factors can move up and down daily, depending on the various economic indicators out of your control. Here’s a short list of the three main market factors.

1. Overall Economy

In prosperous times, people tend to move their money away from bonds and into stocks for the chance of a higher return. As a result, mortgage rates end up going up. The same implies to inflation: if inflation is higher, people have more incentive to invest in stocks since they can’t get the guaranteed rate of return on bonds.

2. Federal Reserve

Contrary to popular opinion, the Federal Reserve doesn’t set mortgage rates. That said, they do affect them by controlling short-term interest rates. If the economy is struggling, such as during the COVID-19 pandemic, the Fed tends to lower rates. When they decide they need to tighten the money supply, they’ll raise the rates back up.

3. Bond Market

Mortgage bonds, or mortgage-backed securities, are mortgage bundles sold in the bond market. Depending on the demand for them, bonds can affect mortgage rates. In general, when the stock market is performing poorly, the demand for mortgage bonds grows and mortgage rates increase as a result. Similarly, mortgage rates decrease when the demand is low.

Personal Factors

Beyond economic factors, your mortgage lender will be interested in the things you can influence. Here are some examples of personal factors that can affect your mortgage rate.

1. Credit Score

Having a high credit score makes you seem like less of a risk, which is reflected in the interest rates you can get. A credit score of 740 or higher will give you a broad range of loan products to choose from. As your credit score drops, the interest rates usually get higher.

2. Down Payment

The higher your down payment, the less money a lender has to give you to finance the transaction, which lowers the risk associated with it. If you put down less than 20% on the home, your mortgage rate will go up and you’ll need to pay mortgage insurance. Some types of insurance are cancellable, but some aren’t.

3. Loan-to-Value Ratio

The loan-to-value ratio (LTV) compares your home’s value to the mortgage amount. For instance, if you make a $20,000 down payment on a $100,000 house, your mortgage will be 80%. Since you’re borrowing 80% of the home’s value, your LTV is 80%. An LTV higher than 80% is seen as high and puts the lender at more risk.