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How Are Mortgage Rates Determined?

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Learning how mortgage rates are determined can help you find the best possible deal for your next home loan. Saving even a fraction of a percent on your mortgage interest rate can translate to thousands of dollars saved during the life of the loan. Learning what affects mortgage rates can prepare you when you’re negotiating your loan during your homebuying journey.

How are mortgage rates determined?

No single element determines the mortgage rate you receive. A combination of factors will ultimately influence how lenders determine your interest rate — some of which you can influence and others you cannot.

For example, if you have a good credit score or choose a shorter-term loan, you can probably get a lower mortgage rate. Meanwhile, economic trends like inflation are out of your hands. That’s why understanding mortgage rates and what causes them to fluctuate are key to saving you money on your home loan.

Factors within your control

Your credit score

Maintaining a good credit score can make a big difference, since it shows mortgage lenders that you’re responsible about paying your bills. Generally speaking, people with higher scores get lower rates.

Here’s one example of how that might play out, based on the Lending Tree’s February 2021 Mortgage Offers Report:

  • Homebuyers with credit scores of at least 760 were offered average annual percentage rates (APRs) of 2.86% for 30-year, fixed-rate loans.
  • Homebuyers with scores of 680 to 719 were offered average APRs of 3.09%.
  • Based on the APR difference, the second group of borrowers would pay almost $13,231 more over the life of a 30-year mortgage.

Your down payment

Generally speaking, the more you put down, the lower your mortgage rate will be because a bigger upfront payment reduces the lender’s risk. A down payment of 20% (or more) means other benefits, including eliminating the need for private mortgage insurance.

If you can put down at least 20% without busting your budget, it could lower your monthly payments.

You loan type

Conforming loans are those that can be purchased by Freddie Mac or Fannie Mae. They usually have the lowest interest rates. However, if you can’t put 20% as your down payment amount, you’ll have to buy private mortgage insurance.

Non-conforming loans, which cannot be sold to Freddie Mac or Fannie Mae, aren’t available from every lender. If you go this route, look for a mortgage interest rate that’s competitive with conforming loan rates.

Federal Housing Administration (FHA) loans are designed for those with less-than-stellar credit. These loans are backed by the FHA, through approved lenders, which keeps interest rates reasonable and down payment requirements low. However, FHA mortgages typically require annual mortgage insurance for the life of the loan.

Veterans Affairs (VA) loans are, as the name suggests, available to veterans and active-duty military members. Generally, there’s an upfront VA funding fee. The advantage to VA loans is that these types of loans require neither down payments nor private mortgage insurance, and they often feature fewer closing costs and lower interest rates.

Your mortgage term

A 15-year mortgage will generally have a lower interest rate than a 30-year home loan. As of March 25, 2021, Freddie Mac listed the 15-year, fixed-rate mortgage average interest rate as 2.45%, while the average rate for a 30-year fixed-rate loan was 3.17%.

Being in a position to take the shorter-term mortgage means you’ll pay less in interest than you would with a 30-year mortgage.

Your location

Where you buy makes a difference, since mortgage rates vary from state to state. For instance, as of March 25, 2021, average 30-year mortgage rates in Connecticut are 3.79%, compared with Colorado at 4.04%.

Homebuyers in rural areas may be able to take advantage of mortgages offered by the U.S. Department of Agriculture (USDA). Interest rates generally lower than other government-backed loans. As of March 2021, this loan had a baseline rate of 2.75%. Some borrowers qualify for subsidies that can drop the interest rate to as low as 1.375%.

Factors outside your control

Bond yield movements

The 10-year Treasury bond is a main indicator for U.S. home loan interest rates. That’s because most mortgages get sold into the mortgage bond market, where they’re turned into pools of loans known as mortgage-backed securities (MBS).

When the yield on 10-year Treasury notes is high, it’s an indication that people are less interested in safe investments like bonds. Consequently, mortgage rates tend to go up. When the yield is low and lots of folks are buying up bonds, rates tend to decrease.

The Federal Reserve’s monetary policy

Normally, the Federal Reserve adjusts the nation’s financial health by altering the federal funds rate, which is the short-term loan rate banks charge each other. In turn, these adjustments affect short-term interest rates for consumers on products like checking accounts, savings accounts and credit card APRs.

The Federal Reserve influences mortgage interest rates by changing what it holds on its balance sheet. Right now, the Federal Reserve has trillions of dollars in assets. About 64% of its assets are held in U.S. Treasury securities while about 29% consists of mortgage-backed securities.

By buying and selling these assets, the Federal Reserve influences how mortgage lenders set interest rates.


Inflation can boost the 10-year Treasury note yield, as the Treasury rate includes an inflation expectation component. And when Treasury bonds go up, mortgage rates tend to follow.

When do mortgage rates change?

There are several situations under which mortgage rates could change:

You pay for mortgage points at closing

Also known as “discount points,” mortgage points can lower your mortgage interest rate. Each point costs 1% of the mortgage loan amount.

To determine whether it’s worth it, divide the cost of the point by the difference from the former and new monthly payments; the result is the number of months it will take for the upfront money to pay for itself. If you plan to stay in the home for significantly longer than that time period, it can make sense to buy points. If not, it might be smart to pass.

You have an adjustable-rate mortgage

A fixed-interest mortgage has a rate that does not change during the term of the loan. The static nature of the monthly payment lets you budget accordingly, with no surprises.

An adjustable-rate mortgage (ARM) might be “fixed” initially — sometimes at a rate significantly below 30-year fixed rates  — but will change after a certain period agreed upon in the loan document. Once the interest rate resets, the loan may become unaffordable if interest rates have gone up, especially if you’ve experienced a loss of income or face some other financial challenge. For that reason, these loans tend to be considered riskier than fixed loans.

Understanding mortgage rates: FAQs

Who sets mortgage rates?

A mortgage lender determines the interest rates you receive. Several factors determine mortgage rates, including the mortgage term, loan type, inflation and bond yield movements. Some of these factors are within your control, whereas others are at the whim of the overall market.

Why do mortgage rates vary by lender?

Mortgage rates may vary by lender because of several factors, one of which is the difference in risk-based pricing models. Lenders will assess a borrower and charge a higher or lower rate based on risk factors, such as how likely a borrower will make on-time payments. Lenders also have differing operational costs and the profit margins, which could affect the rates they offer.

How frequently can mortgage rates fluctuate?

Mortgage rates can fluctuate daily, though you may see averages posted only once a week at sources like Freddie Mac.

How do I find my best mortgage rate?

Getting quotes from multiple lenders is a good way to find the most competitive mortgage rate based on your financial situation. When you do, make sure to look at the loan estimate document carefully to see exactly you’ll be paying. If you’re a first-time homebuyer, most states have programs that offer below market rates to accelerate your path to homeownership.

Are mortgage rates and refinance rates different?

Yes. As of Dec. 1, 2020, Fannie Mae and Freddie Mac implemented an additional 0.5% adverse market fee on mortgage refinances. However, your final rate will depend on the lender and other components, such as your credit score, debt-to-income ratio and for a mortgage refinance, your loan balance.

How can I lower my mortgage rate?

You can lower your rate by purchasing discount points. Every point costs 1% of the loan amount and can lower your rate by 12.5 to 25 basis points. For instance, if the loan amount is $250,000, each point costs $2,500.

Should I lock my mortgage rate?

Since your mortgage rate isn’t guaranteed, it might be a good idea to lock it as soon as possible so you’re not caught off guard. Make sure you’ve compared multiple quotes before doing so. Other scenarios in which it might be a good idea to lock your mortgage rate would be if you’re closing on a home soon, you have enough assets and income to proceed with the closing process and you’ve already sold your current home.


Today's Mortgage Rates

  • 5.88%
  • 5.87%
  • 6.30%
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