Understanding Rates: How They Affect Your Loan

Are you considering a home loan or mortgage? Understanding mortgage rates is essential to the home-buying process. Rates can affect your monthly payment, the total cost of borrowing, and how comfortably a loan fits into your budget. Explore Merchants Bank mortgage rates and test different scenarios using our mortgage calculators. Adjusting the rate, loan amount, or term can quickly show how borrowing costs change, helping you make more informed decisions.

Today’s mortgage rates might feel high compared to the low levels of the past few years, but they are still considered moderate when seen from a historical perspective. For example, the average rate for a conventional 30-year mortgage in 1984 was 13.87% according to the U.S. Department of Housing and Urban Development. Understanding how mortgage rates are determined can help you make smart decisions that fit your financial goals and future.

What Are Rates? 

Rates for a loan determine how much interest you’ll pay to borrow the money from your bank. It directly impacts both your monthly payment and the total cost of the loan over time. For example, if you take out a $200,000 loan with a 7% rate, your monthly payment will be about $1,500, and you’ll pay around $171,000 in interest over the 20-year life of the loan.* 

No matter what type of loan you’re considering, comparing rates is one of the most important steps you can take. Even a small difference of a few tenths of a percentage point could add up to thousands of dollars over time. A mortgage lender may walk you through different rate scenarios, so you understand how each option affects your monthly payment and the total interest you’ll pay over the life of the loan.

How Do Rates Impact Your Loan?

Your interest rate is important, but it’s only one part of the equation. Several other factors work together to determine your total borrowing cost and monthly payment.

Loan Term

The length of time you have to repay the loan. Longer terms may lower your monthly     payment, but often result in more interest paid over time.

Loan Type

There are two primary types of loans, based on rate structures:

• Fixed-rate loans: Your rate stays the same for the entire loan term, providing predictable monthly payments.
• Adjustable-rate loans: Your rate may change periodically based on market conditions.

Fees and Closing Costs

Some loans let you pay fees upfront for a lower rate. Others have fewer upfront     costs but a slightly higher rate.

Your Credit Profile

Your credit score, payment history, income, and overall financial picture help lenders determine your rate. Stronger credit profiles typically qualify for more favorable rates. Learn more about how credit scores work by reading our FAQs.

Because all these factors interact, the lowest rate doesn’t always mean the lowest overall cost. Reviewing different scenarios helps you choose the option that aligns with your financial priorities.

Why Do Interest Rates Change?

It may feel like interest rates fluctuate all the time, and they often do. The fluctuations occur due to the economic environment conditions and financial markets.

One major influence is inflation. When inflation rises, borrowing costs often increase as lenders adjust to the higher cost of money. When inflation stabilizes, rates may follow.

The Federal Reserve (the Fed) also plays an important role. While the Fed doesn’t directly set mortgage or consumer loan rates, its decisions influence the overall direction of borrowing costs. When the Fed adjusts its benchmark rate to help manage inflation or support the economy, lenders typically adjust their rates in response. Other factors that influence rates include:

• Overall economic growth
• Employment trends
• Investor demand in financial markets
• Competition among lenders
• Individual borrower creditworthiness

When Will Mortgage Rates Go Down?  

The short answer is that no one can predict the future with certainty, but current mortgage rates tend to move in response to broader economic trends. In the early 2020s, rates first fell to historic lows during the COVID-19 Pandemic due to the Fed encouraging spending to stimulate the economy, then rose rapidly as inflation increased.

By 2024, even as the Fed began lowering its benchmark rate, mortgage rates did not decline at the same pace, as financial markets waited for clearer signs of long-term economic stability. Now, mortgage rates are showing signs of stabilizing, with future movement likely to depend on inflation trends, economic conditions, and overall market confidence.

While it’s impossible to predict exact timing, understanding these trends helps homebuyers make informed decisions. Buying when you are financially prepared, and refinancing later if rates decline further, may be a practical long-term strategy.

It’s easy to focus on finding the lowest possible rate, but the best loan is one that fits your financial goals, budget, and timeline. Monthly affordability, long-term cost, and payment stability all matter. Working with a knowledgeable mortgage lender will help you understand your options, compare scenarios, and make an informed decision.