What Makes Mortgage Rates Go Down?

In recent years, U.S. consumers watched as mortgage interest spiked until they hit a 23-year high of nearly 8% in October 2023. Now that rates have finally started declining, many would-be homebuyers and sellers are ready to climb off the fence and make a move.

But what makes mortgage rates go down? What are the signs to watch for to determine if they’ll keep going down?

In this post, we’ll look at eight key influences that can cause mortgage rates to go down so you’ll be better prepared to navigate the market and potentially save thousands on your next home purchase or refinance.

1. Slower economic growth

When the economy slows, mortgage rates often follow suit. Declining economic growth can reduce inflationary pressures and lead to less demand for borrowing. Lenders, in turn, may lower interest rates to encourage more borrowing and investment.

For homebuyers, this could mean an opportunity to lock in a lower rate, saving money over the long term. For sellers, a drop in rates might entice more buyers into the market, potentially speeding up the sale of your home.

2. Favorable government policy changes

Government policy can significantly influence mortgage rates. Central banks, like the Federal Reserve, may lower the federal funds rate to stimulate borrowing during economic slowdowns. Lower interest rates can trickle down to the mortgage market, reducing the cost of borrowing.

If you’re in the market for a mortgage, keeping an eye on government policy shifts can help you identify when rates are likely to drop. Timing your purchase or sale during these favorable periods may lead to significant savings.

3. Decreasing inflation rate

Inflation erodes the value of money over time, and when it’s high, lenders raise mortgage rates to protect their returns. However, when inflation begins to decline, it can signal lower costs for borrowing.

As inflation drops, interest rates typically follow, making it a good time to lock in a mortgage. Lower inflation can also increase home affordability, which is beneficial for buyers and sellers alike. Monitor inflation trends to better understand the potential direction of mortgage rates.

4. High borrower credit score

Your credit score is a major factor in determining your mortgage rate. Borrowers with higher credit scores are seen as lower risk, so they often qualify for lower interest rates.

If you’re aiming to secure the best possible rate, improving your credit score should be a priority. Pay down debt, avoid late payments, and check your credit report for errors. A strong credit score not only helps you get a better rate but also broadens your mortgage options.