How Interest Rates Are Determined

An interest rate is probably the most popular topic when it comes to the mortgage industry. Of course, there are much more aspects into this detailed business, such as annual percentage rates, annual prime offer rate, loan programs, and so much more.

Lately, we have seen some historical interest rates and it is crazy to think that many of us are nervous that rates may increase based on how low they have been. The best part about rates is that they are still considered unpredictable no matter how much information we have.

That being said, there are three key aspects that make an interest rate travel up or down. No, the interest rates aren't just random numbers that the lenders think look good so they just send it your way. There is a system!

Loan Officer Beth Southern

Beth Southern

Loan Officer

3 Key Aspects To Determining Interest Rates

1) Inflation

An interest rate will directly relate to the inflation that is taking place in the economy. If we look at the level of inflation today then we can assume that the rates are going to increase. Is that a done deal? Nope, because as said earlier it is unknown as to what rates will do exactly. Interest rates are used as a defense to try and calm inflation down. It only makes sense that if inflation goes crazy then the interest rates will follow to counteract it. If you are unsure as to what inflation is, well the simplest way to put it is that purchasing power is declining.

2) Supply and Demand

Money is crucial when it comes to an interest rate as we all may know. The key idea to remember that is if demand is up and supply is down then the rates are going to rise. Likewise, if the the demand is down and the supply is up then the rates will decrease. It all is based on how strong the economy is during that specific time and what stage it is in.

3) Economy Growth

I know it seems tricky, but when the economy is doing well that means interest rates will actually be higher. The opposite is that if the economy isn't growing very quickly or if it is currently in a harder time then the interest rates will be lower to help kickstart that process. We saw this in 2020 and 2021 as the economy was weakened by many businesses going out of business and people being forced onto unemployment.

What You Can Control

All of that information is fantastic, but it may make you start to think that there is nothing you can do to help your interest rate. That is far from true! You can practice certain habits that'll allow you to qualify for a better interest rate than most. Also, there is a neat little thing called discount points, which allows borrowers to buy a better interest rate. Things you can do include:

  • Produce a strong credit score.
  • Buy a home within your price range and in a location that is what we like to call "mortgage-friendly."
  • Put more down up-front and use a loan program with a term that allows for a better rate.
  • Be able to qualify for a loan program that'll guarantee a lower interest rate.

Interest Rates

We don't expect you to come to us being an interest rate specialist, but we can promise you that we make sure our borrowers are provided the best possible financial options. There is nothing that we want more than to see our borrowers be thrilled with their home and the rate they received to finance it.

What are you waiting for? Give us a call at (877) 455-0440 to get started with your loan application or continue to explore our website for some really great information about why we are the only lender for you.