Understanding Mortgage Rates: What Affects Your Rate and How to Get the Best Deal

Why Your Mortgage Rate Matters

Your mortgage interest rate is one of the most important factors in your home purchase. A difference of just 0.5% can mean tens of thousands of dollars over the life of your loan.

Example on $400,000 mortgage, 30 years:

• At 6.5%: $2,528/month, total interest: $510,177
• At 7.0%: $2,661/month, total interest: $558,036
• Difference: $133/month, $47,859 total

Understanding what affects your rate—and what you can control—helps you get the best possible deal.

What Determines Mortgage Rates

Factors You Can't Control

1. Federal Reserve Policy

The Fed doesn't set mortgage rates directly, but its policies affect them:

• Fed raises rates → Mortgage rates tend to rise
• Fed lowers rates → Mortgage rates tend to fall

2. Economic Conditions

• Inflation: Higher inflation → Higher rates
• Economic growth: Strong growth → Higher rates
• Recession fears: Economic uncertainty → Lower rates

3. Bond Markets

Mortgage rates closely follow the 10-year Treasury yield. When Treasury yields rise, mortgage rates typically follow.

4. Global Events

Economic instability abroad can push investors toward U.S. bonds, potentially lowering rates.

Factors You CAN Control

1. Credit Score

The single biggest factor in your individual rate:

| Credit Score | Approximate Rate Impact | |--------------|------------------------| | 760+ | Best available rates | | 700-759 | +0.25% to +0.5% | | 660-699 | +0.5% to +1.0% | | 620-659 | +1.0% to +1.5% | | Below 620 | May not qualify |

2. Down Payment

Larger down payments = better rates:

• 20%+ down: Best rates, no PMI
• 10-20% down: Slightly higher rates
• 3-10% down: Higher rates, PMI required

3. Loan-to-Value Ratio (LTV)

Lower LTV = Lower risk = Better rates LTV = Loan Amount / Home Value

4. Debt-to-Income Ratio (DTI)

Lower DTI demonstrates better ability to pay:

• Under 36%: Favorable
• 36-43%: Acceptable
• Over 43%: May affect rate or qualification

5. Loan Type

Different loan types have different rates:

• Conventional: Varies by credit/down payment
• FHA: Often slightly higher but more accessible
• VA: Often competitive, no PMI
• Jumbo: Typically higher (larger amounts)

6. Loan Term

• 15-year: Lower rates (typically 0.5-0.75% less)
• 30-year: Higher rates but lower payments
• ARM: Initial rate lower, but adjusts over time

7. Property Type and Use

• Primary residence: Best rates
• Second home: +0.25% to +0.5%
• Investment property: +0.5% to +0.75%

8. Points

You can pay upfront to lower your rate:

• 1 point = 1% of loan amount
• Typically reduces rate by 0.25%
• Worth it if staying long enough to recoup cost

How to Get the Best Rate

Before You Apply

1. Check and Improve Your Credit

6-12 months before applying:

• Get free credit reports (annualcreditreport.com)
• Dispute any errors
• Pay down credit card balances
• Don't open new accounts
• Don't close old accounts

2. Reduce Your DTI

• Pay down debt
• Avoid new debt
• Increase income if possible

3. Save More Down Payment

Even going from 10% to 15% down can improve your rate.

When Shopping

4. Shop Multiple Lenders

Critical: Rates vary significantly between lenders. Get quotes from at least 3-5:

• Banks
• Credit unions
• Online lenders
• Mortgage brokers

5. Compare on the Same Day

Rates change daily. Get all quotes within 24-48 hours for accurate comparison.

6. Look Beyond the Rate

Compare:

• Interest rate
• APR (includes fees)
• Closing costs
• Points
• Lender fees

Sometimes a slightly higher rate with lower fees is better overall.

7. Consider Points Carefully

Paying points makes sense if:

• You'll keep the loan long enough
• You have cash available
• The break-even works

Break-even example:

• Loan: $300,000
• 1 point cost: $3,000
• Rate reduction: 0.25% (saves $44/month)
• Break-even: $3,000 / $44 = 68 months (5.7 years)

If you'll move or refinance before 5.7 years, don't pay points.

8. Lock Your Rate

Once you find a good rate, lock it:

• Typical lock: 30-60 days
• Longer locks may cost more
• Get lock in writing

Negotiation Tips

9. Use Competing Offers

Show lenders competing quotes and ask them to match or beat.

10. Ask About Discounts

Potential discounts for:

• Existing customers
• Automatic payments
• Direct deposit
• Multiple accounts

11. Consider the Lender's Reputation

Cheapest isn't always best. Consider:

• Customer service reputation
• Closing timeline
• Communication
• Online reviews

Fixed vs. Adjustable Rate Mortgages

Fixed-Rate Mortgage

Pros:

• Payment never changes
• Predictability for budgeting
• Protected from rising rates

Cons:

• Higher initial rate than ARM
• Must refinance to get lower rate

Best for: Planning to stay long-term, prefer certainty

Adjustable-Rate Mortgage (ARM)

Structure: Fixed initial period, then adjusts (e.g., 5/1 ARM = fixed 5 years, adjusts annually after)

Pros:

• Lower initial rate (often 0.5-1% less)
• Good if you'll move/refinance before adjustment

Cons:

• Rate can increase significantly
• Payment uncertainty
• Caps may still allow large increases

Best for: Short-term ownership, confident in future refinance

When ARMs Make Sense

Calculate the break-even:

• ARM rate: 5.5% for 5 years
• Fixed rate: 6.5%
• Monthly savings: ~$200 on $300,000 loan
• 5-year savings: $12,000

If you're confident you'll sell or refinance within 5 years, the ARM saves significant money.

Current Rate Environment Context

Understanding historical context helps:

Historical averages:

• 1970s-1980s: 8-18% (peaked at 18.45% in 1981)
• 1990s: 7-9%
• 2000s: 5-7%
• 2010s: 3-5%
• 2020-2021: 2.5-3.5% (historic lows)
• 2022-2024: 6-8%

Today's rates may seem high compared to recent years, but they're historically normal.

When to Refinance

Consider refinancing when:

• Rates drop 0.5-1% below your current rate
• Credit score has improved significantly
• You want to change loan terms
• You need to access equity

Calculate the break-even:

• Refinance costs: ~$5,000
• Monthly savings: $200
• Break-even: 25 months

If you'll stay longer than break-even, refinancing makes sense.

Red Flags to Watch

Avoid lenders who:

• Pressure you to decide immediately
• Won't provide written quotes
• Have significantly higher rates than competitors
• Push unnecessary products
• Have many complaints with CFPB

Your Action Plan

1. 6+ months out: Check credit, address any issues
2. 3 months out: Start monitoring rates
3. Ready to buy: Get multiple quotes on same day
4. Compare carefully: Rate, APR, fees, total cost
5. Negotiate: Use competing quotes
6. Lock: When you find a good rate
7. Close: Complete the process

Conclusion

Your mortgage rate is partially determined by market conditions you can't control, but significantly influenced by factors you can: credit score, down payment, debt level, and shopping behavior.

The effort to improve your profile and shop around can easily save you $50,000 or more over the life of your loan. That's worth the work.

Use our mortgage calculator to see how different rates affect your payment and total cost, and our refinance calculator to evaluate whether refinancing makes sense for your situation.