Graphic showing a percentage sign inside frame of a house

Mortgage rates and the housing market

Nov 15, 2022
Empower Insights

How mortgage rates are calculated and where they might be headed

As if inflation levels weren’t high enough, home buyers are now seeing the highest mortgage rates in more than a decade. As of early-November, a 30-year fixed-rate mortgage averaged 7.08%, according to Freddie Mac.1 That’s more than double the average rate only a year ago.

Why have mortgage rates gone up?

To tamp down inflation, the Federal Reserve has been raising the short-term interest rate that banks pay when they borrow from each other. The Fed has added 3% so far this year, with more rate hikes likely in store. Higher interest rates are designed to cool down the economy and put the brakes on inflation. And although the Fed doesn’t set mortgage rates, when banks pay more to borrow money, they charge you more as well. Hence those mortgage numbers.

The increase can make a big difference. For example, a 30-year mortgage for $300,000 at last year’s average 2.78% rate would cost you around $143,000 in interest over the life of the loan. At today’s rate, you’d pay over $415,000 in interest for the same loan.2

Even fractions of one percent in your interest rate can add up over the years. So it pays to shop around for a mortgage—and to be aware of how lenders determine mortgage rates.

Quote. The Fed doesn't set mortgage rates, but when banks pay more to borrow money, they charge you more as well.

How do lenders determine mortgage rates?

Different home buyers qualify for different interest rates. Here’s an overview of the factors that affect your rate:

Your credit score
Home buyers with good credit scores generally qualify for better mortgage rates because they are considered less risky. The three credit bureaus use different algorithms to calculate your score, but they are similar. The most important factor is paying all your bills on time. A score of 700 or higher is optimal.

Your income and debt
Your income is a limiting factor in the size of your loan, but lenders also consider what’s called your debt-to-income ratio (DTI) when determining your rate. The ratio refers to your total monthly debt as a percentage of your family’s gross monthly income. Lenders typically prefer a DTI of no more than 36%, including the loan you are applying for (along with expenses like property tax and insurance). A higher DTI suggests you could be a riskier loan recipient, so you’ll pay more to borrow.

The size of your down payment
A down payment of at least 20% usually merits a better mortgage rate, since the bank knows you’ve got “skin in the game” and will be less likely to risk losing your home in foreclosure. Moreover, down payments of less than 20% often require you to buy private mortgage insurance (PMI), typically around 1% of the mortgage annually.

The loan type and term
Besides conventional mortgages, you might qualify for a loan underwritten by federal government agencies such as the FHA, USDA or VA. Sometimes they have better terms, depending on your situation. Some lenders also handle those loans and can help you figure it out.

Rates also differ between fixed and adjustable-rate mortgages (ARMs), but be careful: rates on an ARM usually start low, then increase after a few years—often by a lot.

Finally, the term of your loan will also affect your rate. The average cost of a 15-year fixed-rate mortgage was 6.38% as of November 10—almost a point less than a 30-year mortgage. However, the monthly payments will be much larger given the shorter payoff period.

A woman's hand types on a calculator

Reviewing your loan estimate

Whatever type of loan you apply for, you’ll receive a written loan estimate from the lender that will detail your mortgage rate plus the fees, closing costs and so-called discount points, which are upfront interest charges tacked on at the beginning of your loan that reduce your monthly payment.

If you’re planning to stay in your house a long time, paying more in points—and less every month—can be a good deal. On the other hand, if you think you’ll be selling the house within a few years, it might be wiser to settle for fewer, or no points and a higher monthly payment.

When you review the loan estimate, focus on the annual percentage rate, or APR, which is the actual interest rate after factoring in all fees, points and closing costs. The APR allows you to compare loans that may have the same nominal interest rate but different upfront costs. Note that the APR on an adjustable-rate loan will generally not reflect the future interest rate, which is determined by market conditions.

Mortgage rates forecast

Wondering whether you should buy now or wait? No one can say for sure where rates or home prices are headed. But as the economy slows due to Fed policy, mortgage rates are likely to moderate. Some experts believe the rate on a 30-year fixed mortgage will hover around 5-6% over the next year, while others are predicting a “new normal” of about 7%.3

If higher mortgage rates are getting you down, take heart: We’re not even close to record-breaking rates like the 18% seen back in 1981. Moreover, higher rates are likely to cool down home prices, which could land you a better house for a smaller down payment.



1 Freddie Mac, November 2022.

2, Mortgage Calculator, November 2022.

3 Forbes, “Mortgage Rate Predictions for 2022,” July 2022.