What determines mortgage rates
Mortgage rates are influenced by two broad sets of factors: market conditions that affect the entire lending market, and borrower-specific factors that affect the rate you are personally offered. Understanding both helps you separate what you can control from what you cannot.
On the market side, inflation is a major driver. When inflation is high, lenders demand higher rates to preserve their returns. The Federal Reserve's monetary policy also matters: changes to the federal funds rate can influence mortgage rates, though the connection for fixed-rate mortgages is indirect. A stronger or weaker economy and the overall demand for mortgage-backed securities play a role as well.
Borrower-specific factors are the ones you can act on before you apply. Lenders evaluate your creditworthiness and the risk of the loan, and they set your rate accordingly.
- Market factors: inflation, Federal Reserve policy, and the state of the economy.
- Borrower factors: credit score, down payment size, and debt-to-income ratio.
- Loan factors: loan type, loan term, and whether the loan is conforming or jumbo.
Sources: JPMorgan Chase & Co., Rocket Mortgage, Investopedia, U.S. Bank
Borrower-controlled factors: credit score, down payment, debt-to-income ratio
Your credit score is the single most important borrower-controlled factor. A higher score signals lower risk to lenders, which generally results in a lower interest rate. Even a modest improvement in your credit score can translate into meaningful savings over the life of a loan.
Your down payment also matters. A larger down payment reduces the lender's risk because you have more equity at stake, and it can help you qualify for a lower rate. Lenders also look at your debt-to-income (DTI) ratio, which compares your monthly debt payments to your gross monthly income. A lower DTI indicates you have more room in your budget to handle mortgage payments, and lenders typically reward that with a more favorable rate.
Keep in mind that these factors don't act in isolation. A strong credit score can compensate for a smaller down payment, and a large down payment can offset a higher DTI. The exact combination that lenders reward varies by lender and program.
Sources: JPMorgan Chase & Co., Rocket Mortgage, U.S. Bank
Reading rate quotes: APR vs. interest rate
When you receive a mortgage quote, you will see both an interest rate and an annual percentage rate (APR). They are not the same thing. The interest rate is the base cost of borrowing, expressed as a yearly percentage. It does not include lender fees, points, or other closing costs.
The APR is a broader measure. It includes the interest rate plus certain other costs, such as points, broker fees, and other credit charges, and it is expressed as a yearly rate. Because the APR includes those fees, it gives you a more complete view of the true cost of the loan.
For that reason, when you compare quotes from different lenders, focus on the APR rather than the interest rate alone. Two lenders might offer the same interest rate but very different APRs if one charges higher fees.
- Interest rate: the base annual cost of borrowing, before most fees.
- APR: includes the interest rate plus points and certain other charges, giving a fuller cost picture.
- Use APR to compare total loan costs across lenders.
Sources: U.S. Department of Housing and Urban Development, Bankrate, Investopedia, U.S. Bank
Rate locks: how they work and what to ask
A rate lock is a written agreement between you and the lender that specifies the interest rate, the length of time the lock is in effect, and the number of points you will pay. The lock protects you from rate increases while your loan is being processed.
If rates fall after you lock, you could end up with a rate that is less favorable than the current market. In that case, you may be able to negotiate with the lender to get a compromise or a better rate, but the terms of that negotiation are not guaranteed.
When you are considering a rate lock, ask your lender for the exact length of the lock and whether there is any fee to extend it. Also ask if a rate-drop option is available and what terms apply, since availability and conditions vary by lender.
- A rate lock protects you from rate increases during processing.
- If rates fall, you may be stuck with a higher rate unless you negotiate a compromise.
- Always ask about lock duration, extension fees, and any rate-drop provisions.
How to compare rate quotes from different lenders
Rate quotes can vary significantly from one lender to the next. That is because lenders have different overhead costs, business goals, and pricing strategies. Some may be willing to accept a lower profit margin to win your business, while others price higher to offset costs. That means the same borrower can receive different rates for the same loan type and amount.
To get a meaningful comparison, gather quotes from several lenders for the same loan program, term, and lock period. When you receive the quotes, compare not just the interest rate but also the APR, which includes fees. A lender with a slightly higher interest rate but lower fees might end up being cheaper overall.
Also look at the Loan Estimate form, which lenders are required to provide. The Loan Estimate itemizes the loan terms, projected payments, and closing costs, making it easier to see the full financial picture. Compare the 'In 5 Years' section and the total closing costs between estimates to get a clear side-by-side view.
- Get quotes from multiple lenders for the same loan type and term.
- Compare APR as well as interest rate, because APR includes fees.
- Use the Loan Estimate to compare closing costs and projected payments.
Sources: U.S. Department of Housing and Urban Development, Bankrate, Rocket Mortgage, Investopedia
Using a Loan Estimate to compare rates and fees
The Loan Estimate is a standardized three-page form that lenders must give you within three business days of receiving your application. It provides key details, including the loan amount, interest rate, monthly payment, and a breakdown of closing costs. This standardization makes it easier to compare offers side by side.
When you compare Loan Estimates, look at the 'Loan Terms' section for the interest rate and APR. Then look at the 'Projected Payments' section to see how your monthly payment breaks down. Finally, examine the 'Closing Cost Details' section to see how much you will pay in lender fees, third-party fees, and other costs.
Pay special attention to the 'Total Closing Costs (J)' line, and be aware that some estimates may not include all fees. If a lender leaves out a fee, ask for a corrected estimate. Also compare the 'Cash to Close' figure, which shows the total amount you need at closing.
Common pitfalls when shopping for rates
Shopping for a mortgage rate can be overwhelming, but avoiding a few common mistakes can save you money and frustration.
One pitfall is focusing only on the interest rate and ignoring the APR. A low interest rate might come with high fees that make the loan more expensive overall. Conversely, a slightly higher rate with no fees could be the better deal.
Another pitfall is not shopping around enough. Because lenders vary in their pricing, getting only one or two quotes may mean you miss a significantly better offer. It is wise to get quotes from multiple lenders.
A third pitfall is failing to lock in your rate at the right time. If you wait, rates could rise, and you will end up paying more. On the other hand, locking too early might mean you miss a rate drop. Work with your lender to choose a lock period that fits your timeline, and ask about your options if rates fall.
- Focusing only on interest rate instead of APR.
- Not shopping around enough; get multiple quotes.
- Locking at the wrong time; ask about your lock period and options if rates drop.
Sources: U.S. Department of Housing and Urban Development, Bankrate
Frequently asked questions
Why do mortgage rates change?
Mortgage rates change because of shifts in market conditions such as inflation, Federal Reserve monetary policy, and the overall economy. When inflation rises, lenders typically raise rates to keep their returns attractive. The Federal Reserve's actions can also influence rates, though the impact on fixed-rate mortgages is indirect. Changes in investor demand for mortgage-backed securities also play a role.
Sources: Rocket Mortgage, Investopedia, U.S. BankWhat is a good mortgage rate?
A good mortgage rate is one that is competitive for your specific financial profile and the current market environment. It depends on your credit score, down payment, loan term, and loan type. Rather than aiming for a specific number, compare offers from multiple lenders and focus on the APR, which includes fees. A rate that is lower than the average for your profile is generally a good deal.
Sources: Bankrate, InvestopediaWhat is the difference between APR and interest rate?
The interest rate is the base annual cost of borrowing, expressed as a percentage. The APR includes the interest rate plus certain other costs, such as points, broker fees, and some closing costs, and it is shown as a yearly rate. Because the APR includes those fees, it provides a more complete picture of the total cost of the loan. When comparing offers, use the APR rather than just the interest rate.
Sources: U.S. Department of Housing and Urban Development, Bankrate, U.S. BankHow important is my credit score when getting a mortgage rate?
Your credit score is very important. A higher credit score signals lower risk to lenders, which generally results in a lower interest rate. Improving your score before applying can help you qualify for a better rate, potentially saving you thousands over the life of the loan. Even a moderate increase in credit score can make a meaningful difference.
Sources: JPMorgan Chase & Co., Rocket Mortgage, U.S. BankShould I buy mortgage points to lower my rate?
Buying discount points means paying prepaid interest at closing to reduce your interest rate. Typically, one point costs 1% of the loan amount and may lower the rate, though the exact reduction varies. Whether it makes sense depends on how long you plan to stay in the home. If you keep the loan long enough for the monthly savings to exceed the upfront cost, points can be worthwhile. If you expect to sell or refinance in a few years, points might not pay off.
Sources: Rocket Mortgage, InvestopediaCan I negotiate mortgage rates with lenders?
Yes, you can often negotiate rates and fees with lenders. Because lenders have different pricing strategies and overhead costs, there is frequently room to ask for a better rate or lower fees. Compare offers from multiple lenders and mention to a lender that you have a better quote; they may match or beat it. Being prepared to walk away can also give you leverage.
Sources: Bankrate, Rocket Mortgage, InvestopediaSources
- Looking for the best mortgage: shop, compare, negotiate — U.S. Department of Housing and Urban Development
- Compare current mortgage rates for today — Bankrate
- What Factors Determine and Affect Mortgage Rates? — JPMorgan Chase & Co.
- How are mortgage rates determined? — Rocket Mortgage
- Compare Mortgage Rates Today (August 27) — Rates Currently As Low As 6.79% — Investopedia
- Understanding mortgage APR vs. interest rate — U.S. Bank