May 27, 2021 Cody Marchant

How are Mortgage Rates Calculated?

Mortgage rates have a huge effect on how much you will pay over the life of your loan. 

So how are mortgage rates calculated? 

There are both internal factors like your credit score and down payment, and external factors like inflation.

Getting the best interest rate can dramatically change your monthly payments over the life of the loan and save you upwards of hundreds of thousands of dollars, depending on the size of your loan. Therefore, it’s important to know how mortgage rates are calculated.

What You Can Do to Get a Better Mortgage Rate

Lenders determine your mortgage rates based on how risky they think it will be to lend you money. The higher the risk, the higher the rate. Before offering you a rate, they assess your financial background and look for information such as how often you’ve missed payments in the past, and then determine how likely you are to follow that same pattern.

Here are a few things that may need to be corrected before having a lender dig into your history.

Credit Score

You have complete control over your credit score, and it’s one of the biggest factors that affects your mortgage rate. Lenders will look at many points of data that are grouped into different categories, such as: 

  • Payment history
  • Amount Owed
  • Length of Credit History
  • Lines of Credit
  • New Credit

The higher your score, the better chance you have of a lower mortgage rate. There are loan programs available to help borrowers with scores under 620. Those with credit scores 621-699 are still considered risky but will have more loan options. And, of course, if your score is 700-740+, you’ll have the top pick from the best loan options.

By optimizing your credit score, you will be able to qualify for more loans and capitalize on savings. 

Loan-to-Value Ratio

The loan-to-value (LTV) ratio compares the total amount of the loan with the market value of the home you want to purchase.

For example, a lender would calculate the LVT at 80% for a down payment of $20,000 for a home that costs $100,000. The higher the LTV ratio, the riskier the loan. Keeping the LTV below 80% will increase your odds of a better loan.

To help get an estimate on down payment and monthly payments, check out our Mortgage Calculator.

Employment and Income Stability

A risk factor that lenders often look at when determining mortgage rates is the job history of the borrower. The longer you’ve been employed with a company, and the fewer gaps you have between jobs, the better chance you have at looking credible and reliable to help secure a lower mortgage rate.

Type of Mortgage Loan

Rates vary depending on the type of loan you need. Loans on second homes, investment properties, and manufactured homes are considered riskier so they will come with a higher rate. The same rings are true for adjustable-rate mortgages and a cash-out refinance.  

Make sure you analyze each mortgage loan type to find a mortgage rate that is best for you. 

Mortgage Rate

Factors You Cannot Control When It Comes to Mortgage Rate Calculations

While you can help control your credit score, job history, down payment, and even the type of loan you apply for, you cannot control the overall market. Mortgage rates fluctuate daily based on things like:


Inflation affects everything – gas, groceries, utilities – which means, in the eyes of a lender, that borrowers have less money to pay towards a mortgage. Less money in your pocket means more risk for the lender. Keeping your debt-to-income ratio low is critical in times of inflation because inflation increases home prices.

Federal Reserve

While the Federal Reserve doesn’t set mortgage rates, it does influence them. When applying for a mortgage, it’s important to watch what the economy is doing. If the economy is taking off with low unemployment rates, then mortgage rates rise. When the economy staggers or slows down, mortgage rates drop.

The Job Report

Once a month, the Bureau of Labor Statistics releases the Employment Situation Summary which looks at employment trends and other details. The indicators show inflation triggers, which will cause mortgage rates to rise or will show signs of a weakening economy which will make lenders more lenient with mortgage rates.

Finding the Best Mortgage Rates

Now that you’re armed with the information to make you a well-informed buyer, it’s time to use that knowledge to get you the best rate! 

All Loan Compass users are waived the full lending fees at Guaranteed Rate, saving you over $1,000. 

In addition, Loan Compass visitors receive preferred mortgage rates, saving you even more. 

Get your free no-obligation quote and start saving today!  

One of the most important things our experienced loan officers stress to homebuyers is to shop around before locking in a mortgage rate. Every lender is different and will offer you a different mortgage rate, so it’s best to weigh your options.

If you are new to the homebuying process or want to learn more about the homebuying process, our experts at Loan Compass can help. 

Speak with an experienced loan officer today for more information!