# How Mortgage Rates Work

At its core, a mortgage rate is the interest rate charged on a mortgage loan

Interest on a mortgage is the additional cost paid to the lender for borrowing money to buy a home. It’s typically expressed as a percentage of the loan amount and is charged regularly, usually monthly, based on the outstanding balance. The amount of interest paid over the life of the loan depends on the interest rate, the loan amount, and the loan term

One key determinant of mortgage rates is the overall health of the economy

During economic growth, mortgage rates tend to rise as loan demand increases. This is because lenders see more opportunities for profit and can afford to charge higher rates. Conversely, rates often decrease during economic downturns to stimulate borrowing and spending, as lenders are more willing to offer lower rates to attract borrowers.

Another important factor influencing mortgage rates is inflation

Lenders typically raise mortgage rates when inflation rises to maintain their purchasing power over time. Conversely, when inflation is low, mortgage rates may decrease to stimulate borrowing and economic activity.

The state of the housing market also significantly influences mortgage rates

In areas with high demand and limited housing inventory, rates may be higher to reflect the market’s competitive nature. Conversely, rates may favor buyers in areas with ample supply and lower demand.

Borrower-specific factors such as credit score, down payment amount, and loan term also impact mortgage rates

The loan term is the length of time you have to repay the loan. Generally, borrowers with higher credit scores and larger down payments are offered lower interest rates, as they are considered less risky to lenders. Similarly, shorter loan terms often come with lower interest rates, as lenders are taking on less risk by lending you money for a shorter period.

Additionally, mortgage points offer another way to manage your interest rate

Points are a form of prepaid interest, where each point is equal to 1% of the loan amount. You can buy down the rate by paying more points upfront. This upfront payment can secure a lower interest rate over the life of the loan. Alternatively, you can opt for a higher interest rate and receive lender-paid points (or lender credits), which can be applied towards your closing costs.