What moves mortgage rates, and what you control
The market forces behind mortgage rates, and the personal factors that determine the rate you are actually offered.
By Daniel Hennek, Owner – Principal Broker, NMLS 198218
Updated
Mortgage rates move every day, sometimes more than once a day. Headlines can make it sound as though one number is set in Washington, but that is not how rates work. Your rate comes from two layers: the market, which sets the starting point for everyone, and your own file, which determines where you land. You cannot control the first. You can control much of the second.
Layer 1: the market
The bond market
Most mortgages are bundled into mortgage-backed securities (MBS) and sold to investors, and most of those securities are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The price investors will pay for those bonds sets the base for the rates lenders can offer. When MBS prices rise, rates tend to fall. When MBS prices fall, rates tend to rise.
Mortgage rates also tend to move with the 10-year Treasury yield, the usual benchmark. MBS compete with Treasuries for the same investors, and a 30-year mortgage is usually paid off or refinanced well before 30 years, so investors compare it with a medium-term bond. Mortgages carry more risk than Treasuries, including the risk that borrowers refinance early, so mortgage rates sit above the 10-year yield. That gap, called the spread, widens and narrows over time.
Inflation
Inflation erodes the fixed return a bond investor earns. When inflation is high or expected to rise, investors want a higher yield, and mortgage rates tend to rise with it. When inflation cools, the pressure eases. That is why reports on prices, jobs and wages can move rates on the day they are released.
The Federal Reserve
The Fed sets a target range for the federal funds rate, an overnight rate banks charge each other. It does not set mortgage rates. A Fed cut does not mean mortgage rates fall by the same amount, or at all. Markets often price in a move before it happens, and long-term rates respond more to what investors expect about inflation and growth.
The Fed can also affect mortgages more directly by buying or letting go of MBS and Treasuries on its balance sheet, which changes demand for those bonds.
Lender pricing
Each lender turns the market into its own rate sheet. Two lenders on the same day can quote different prices for the same loan. Lenders adjust for how much business they want, their costs, how busy they are and their own rules. Rate sheets can change during the day when the bond market moves.
This is an important reason to compare lenders. Because we are a broker, we see pricing from several wholesale lenders for the same file. You can read more in how brokers find better rates.
Layer 2: you
The CFPB lists seven factors that shape the rate you are offered. The table below shows how each one works.
| Factor | How it affects your rate |
|---|---|
| Credit score | Higher scores usually price better. Pricing moves in tiers, so a few points can matter near a break point. |
| Down payment | A larger down payment lowers the lender’s risk. Pricing and mortgage insurance often change at 5%, 10%, 15% and 20% down. |
| Loan type | Conventional, FHA, VA and USDA each price differently. VA rates are typically the lowest of the four, and if you qualify for VA, it is often the best option. |
| Loan term | Shorter terms, such as 15 years, usually carry lower rates than 30 years. |
| Rate type | Fixed or adjustable. An adjustable rate starts at one rate and can change later. |
| Loan amount and price | Very small loans and loans above the conforming limit can price differently. |
| Location | Rates and costs vary by state and sometimes by county. |
Points
You can also buy down the rate. Discount points are prepaid interest. You pay more at closing in exchange for a lower rate. This is a trade-off, and it pays off only if you keep the loan long enough. The points lesson shows how to find the break-even.
Rate versus APR
The rate is the cost of borrowing the money. The APR includes certain fees and points, so it is a better way to compare offers with different costs. See rate and APR.
What this means for you
- Market timing. No one reliably predicts where rates will go next, including lenders and economists. A better approach is to choose a home that fits your budget at today’s numbers.
- What you control. Credit, down payment tier, loan type, term and points often move your rate more than a week of market news.
- Same-day comparisons. Rates change daily, so compare Loan Estimates issued close together, for the same loan.
- When to lock. Once you are under contract, the market risk is yours until you lock. For more, read should you lock your rate.
Sources: Federal Reserve Bank of St. Louis: What determines mortgage rates?. Federal Reserve Bank of Boston: Why mortgage rates exceed Treasury yields. CFPB: 7 factors that determine your mortgage interest rate. Federal Reserve: Monetary policy. Fannie Mae Loan-Level Price Adjustment Matrix. CFPB: How should I use lender credits and points?.
Keep reading
- Should you lock your mortgage rate? Pros, cons and tipsWhat a rate lock protects, what it costs, and how to choose a lock period that covers your closing.
- CHFA loans: what down payment help really costsHow CHFA's grant and second mortgage work, what they can cost over time, and how to compare before you choose.
- Is now a good time to refinance? How to tellA refinance makes sense when the numbers work for your plans, whatever the headlines say about rates. Here is how to check.