The factors that cause mortgage rates to rise and fall

What Causes Mortgage Rates to Rise & Fall?

Mortgage rate is one term that every person in the real estate market is aware of. It’s something that can keep rising beyond reasonable levels and something that can fall and hold record lows.

If you’re searching for a specific formula that’ll tell you when it’s the perfect time to borrow, you’d better strap in for a long ride. Numerous factors contribute to the rise and fall of mortgage rates.

However, a few factors always seem to contribute to every mortgage rate move. Before jumping into the driving hand behind mortgage rates, it’s important to understand what it exactly is.

What Is a Mortgage Rate?

Unless you have loads of cash sitting around to purchase your home with an upfront cash payment, your home purchase will involve a mortgage—and that comes hand-in-hand with a mortgage rate.

Simply put, a mortgage rate is the interest rate charged on a mortgage.

Understanding the Mortgage Types

There are several mortgage types, but the most common come in the following forms:

  • Variable-rate mortgage
  • Fixed-rate mortgage
  • Adjustable-rate mortgage

Variable mortgages have an initial interest rate set below the market rate, making them appealing for many borrowers. They come with the benefit of rates lowering with the market but run the risk of rising with the market as well. Fortunately, variable mortgages come with a steady monthly payment.

Fixed-rate mortgages typically have a higher initial rate than their counterparts. However, borrowers benefit from knowing the exact monthly payment throughout the life of the loan, with no surprises.

Similar to variable rates, adjustable-rate mortgages (ARMs) also fluctuate with interest rates. But they come with an additional disadvantage of having monthly payments fluctuate as well.

The Rising Trend

2022 has shown itself to be a year with back-to-back rising inflation, interest rates and prices in other consumer essentials.

There are two ways to look at the rise in costs across the board. One is to consider borrowing now before rates get any higher, and the other is to wait for “the right time” and potentially miss out.

As mentioned earlier, numerous factors affect the final mortgage rate you receive. Some of the most common include:

  • Inflation
  • Bond market movements
  • Federal Reserve verbiage, policy and market expectations
  • Increasing lender fees
  • Overall economic conditions
  • Borrower’s financial picture

A drastic change in any of these factors mentioned alone will not intentionally affect mortgage rates. Generally, higher rates follow a strong and growing economy, while a slowing economy can present lower rates.


When attempting to map out whether mortgage rates will rise or fall, inflation is the first factor to consider. That’s because it’s also a major consideration for most lenders.

A vast majority of lenders make money on the interest charged on mortgage loans. They must consider inflation because it can potentially bite into their bottom line.

More often than not, when you have higher inflation rates, you can expect lenders to increase mortgage rates for new loans as well. This can be unsettling for many borrowers when inflation seems to be on a rising trend.

Similarly, when inflation numbers start to fall, borrowers can expect falling mortgage rates—as long as other factors also point in that direction.

Follow the Bond Market

The bond market can be boring for many investors and traders, but it’s essential because it shows market sentiment. This is because mortgages are also a financial instrument. They’re traded explicitly as a mortgage bond or mortgage-backed security.

Each home loan on the market is categorized based on its risk levels. If a home loan’s borrower has a positive financial picture, then it’s deemed as a safer investment and is subject to a lower rate of return.

That’s one reason why those with positive financial outlooks typically receive a much lower interest rate. You must understand that bonds are a risk-off investment that many investors consider safe due to the guaranteed yield.

So when you hear or see that the market has been transitioning from risk-on investments like stocks to risk-off like mortgage bonds, you can expect mortgage rates to fall soon.

Similarly, when you see or hear the market transition from risk-off to risk-on, you can expect rates to rise to entice more investors to higher, guaranteed yields.

The Federal Reserve

Federal Reserve meetings and announcements are when the market holds its breath for a brief moment. The slightest change in rhetoric coming out of these meetings can set expectations until their next release.

That’s because the sole purpose of the Fed and other global Central Banks is to maintain stable inflation rates. In addition to meeting releases, the Fed has other tools to help achieve its goal.
One of which is directly affecting the money supply by controlling interest rates. To clarify, the Federal Reserve doesn’t set the actual mortgage rate.

Instead, final mortgage rates result from a chain reaction of various economic factors and the federal funds rate. This is the rate that banks borrow and trade from each other overnight.

By controlling this, the Fed ultimately controls the available money supply. When the Fed sets low short-term interest rates, it makes money cheaper for banks to borrow. The savings are then passed on to the consumer.

Conversely, if the Fed comes out and says or even hints at the potential of raising interest rates, it will make borrowing much more expensive for banks. Of course, the cost is then passed down to the consumer once again.

Increasing Lender Fees

Any added costs for lenders will also pass down to the borrower as a higher mortgage rate. Similarly, any lender fees that get removed may point towards decreasing rates. For example, Fannie May and Freddie Mac eliminated the Adverse Market Refinance Fee, which ultimately meant lower costs for borrowers.

Overall Economic Conditions

It’s safe to say that overall economic conditions play a considerable role in whether mortgage rates rise or fall. As briefly mentioned earlier, a strong economy generally leads to rising mortgage rates and a slowing economy points towards lower rates.

Rates typically rise with increased demand because lenders have more room to demand a higher amount when people in a strong economy also have more money.

However, rates have maintained historic lows in 2020 and 2021 despite strong demand for homes precisely due to the low rates. This proves that you must always consider several factors when determining whether it will rise or fall.

Borrower’s Financial Picture

Although a borrower’s personal finances don’t affect market mortgage rates, they will affect the final mortgage rate offered.

Like any investment, lenders want a higher rate of return for any riskier investments. A credit score is a major indicator of risk. Generally, having a higher credit score indicates that you have a long history of making payments on time. This translates to a lower risk for the lender, which results in lower rates for borrowers.

On the same note, coming to a lender with a down payment of 20 percent or higher also takes a significant amount of risk off their hands. Borrowing with a lower down payment means borrowers must pay for mortgage insurance. This also may affect the final mortgage rate borrowers receive.

Will Mortgage Rise or Fall?

There’s no magic formula to determine whether a mortgage rate will rise or fall. Instead, a borrower can determine the general direction by taking a bird’s eye view of several key considerations.

As of this writing, the war in Ukraine has pushed down mortgage rates. However, several other factors indicate that the fall is temporary. Potential borrowers in Scottsdale and across the nation could see rates rising again.

Understanding what moves mortgage rates can be overwhelming. It’s certainly stressful waiting for the “perfect time” and to have it never arrive. More often than not, if you’re comfortable with the cost to borrow at current rates, it’s typically more beneficial to act now than to wait.

Get in touch with one of our specialists to see if now is the best time to refinance or take on a new mortgage!

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