4 Frequently Asked Questions About Mortgage Interest Rates

In simple terms, interest rates are what consumers are charged by a financial institution to borrow money. In the current economy, interest rates — especially mortgage interest rates — have taken center stage.

As consumers consider refinancing or applying for a new mortgage, they may have several questions related to their mortgage interest rate:

• How are mortgage interest rates determined?
• What causes them to go up or down?
• When is the best time to lock in your interest rate?
• How does the mortgage interest tax deduction work? 

Here are answers to 4 frequently asked questions about mortgage interest rates.

Mortgage Interest Rate Question #1: How are mortgage interest rates determined?

If you’re not entirely sure how mortgage interest rates are determined, you’re not alone. How home loan interest rates are set is often misunderstood.

In general, U.S. Treasury bills, bonds, and notes influence mortgage interest rates. More specifically, home loan interest rates are determined by the bond market, including mortgage bonds and mortgage-backed securities. Because most home loans are bundled by lenders and sold on the bond market, home loan interest rates are most dependent upon how that market is performing.

A common misconception is that the Federal Reserve determines mortgage interest rates. When the Fed lowers interest rates, it is often assumed that mortgage interest rates will also decrease. This is not always the case. Adjustable-rate mortgages, or ARMs, can be influenced by the Fed — but not fixed-rate mortgage interest rates. It’s important to understand, however, that the Fed can impact mortgage interest rates indirectly since its actions often affect the economy, inflation, and the decision-making of investors.

Mortgage Interest Rate Question #2: Why do mortgage interest rates go up or down?

Mortgage-backed securities are the most significant contributor to mortgage rate changes, along with various economic factors. Since home loans are packaged into bundles — also known as mortgage-backed securities — and sold on the bond market, lender and investor risk appetite for those securities can cause mortgage rates to fluctuate.

In general, investors typically favor bonds when the economic outlook is poor. When purchases of bonds increase, mortgage interest rates decrease. The opposite is also true. When the economy is doing well, stocks become more favorable, forcing bond prices lower and increasing mortgage interest rates.

Keep in mind that in addition to the purchase and sale of bonds, many factors can cause interest rates to go up or down, which makes forecasting rate changes difficult. Government-sponsored mortgage facilitator Fannie Mae offers a monthly housing forecast on its website.

Curious about home loan interest rates in Idaho and Utah? Contact a Zions Bank mortgage lender in your area to get answers to your mortgage interest rate questions, or local assistance with the home-buying process.

Mortgage Interest Rate Question #3: When does it make sense to lock in an interest rate?

If you search online for mortgage interest rates, you’ll likely find an average, rather than a precise rate that applies to your individual application. Interest rates are affected by factors such as your credit score, loan amount, down payment, and economic conditions as well as the financial institution you choose -- so it’s important to shop around for a competitive interest rate.

Once your personalized mortgage interest rate is determined, you can lock in that interest rate when you apply for a home loan.

You can also wait and see if a lower rate becomes available between the time of your application and your closing date. With the latter strategy, however, there is risk involved. You might be tempted to wait and see if a lower rate becomes available, but keep in mind that the opposite could also happen.

If mortgage interest rates increase, you may lose some of your initial home-buying power, which could jeopardize your home purchase.

Mortgage Interest Rate Question #4: Can home loan interest be deducted on taxes?

The simple answer is yes, mortgage interest is tax-deductible. Homeowners can use IRS Form 8396 to deduct mortgage loan interest from their taxable income.

There is a more complex answer, though. With the passage of the Tax Cuts and Jobs Act, you must now itemize your tax deductions if you wish to claim mortgage interest. If you choose to itemize, you must also forego the standard deduction. For some homeowners, itemizing may be a wise tax decision, but most will likely claim the standard deduction.

Be sure to consult with your tax advisor to understand how tax laws may apply to your situation.

Have more questions about mortgage interest rates? Visit the Zions Bank Home Loan Learning Center to compare home loans, answer your mortgage questions, discover additional mortgage resources, or find a nearby mortgage loan officer to speak with.