Mortgage Rates Explained: What Determines Your Interest Rate

How Mortgage Rates Are Set

Mortgage rates are not directly set by the Federal Reserve. Instead, they closely track the yield on 10-year Treasury bonds, with a spread of typically 1.5-2.5%. When Treasury yields rise (due to inflation expectations, economic growth, or Fed policy), mortgage rates follow.

Factors You Can Control

Credit Score: The single biggest factor in your individual rate. Borrowers with 760+ scores get the best rates, while scores below 680 face rates 0.5-1.5% higher. Each 20-point increment matters.

Down Payment: Larger down payments reduce lender risk and lower your rate. The biggest improvement comes at 20% (no PMI required). Going from 5% to 20% down can save 0.25-0.50% on your rate.

Loan Type and Term: 15-year loans carry lower rates than 30-year. Conventional often beats FHA for borrowers with 700+ credit. ARMs offer the lowest initial rates.

Points: Buying discount points at closing lowers your rate. One point (1% of the loan) typically reduces the rate by 0.25%. This makes sense if you will keep the loan 5+ years.

Factors You Cannot Control

Federal Reserve Policy: The Fed's benchmark rate influences short-term rates and investor sentiment, indirectly affecting mortgage rates.

Inflation: Higher inflation expectations push mortgage rates up as investors demand higher yields to maintain real returns.

Bond Market: Mortgage-backed securities compete with Treasury bonds. When bond prices fall (yields rise), mortgage rates increase.

How to Get the Best Rate

Shop at least 3-5 lenders. The difference between the lowest and highest offer can be 0.5-0.75% or more. Lock your rate when you find a good offer — rate locks are typically free for 30-60 days.