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

What Determines Your Mortgage Rate

Your mortgage rate is set by two categories of factors: market conditions you cannot control and personal factors you can influence.

Market factors

The Federal Reserve sets the federal funds rate, which influences short-term interest rates. However, mortgage rates more closely track the 10-year Treasury yield. When investors feel confident in the economy, they move money from bonds to stocks, pushing bond yields (and mortgage rates) up. When uncertainty rises, investors buy bonds for safety, pushing yields (and rates) down. Inflation expectations also play a major role — higher expected inflation leads to higher rates because lenders need to maintain real returns.

Personal factors you can control

• -Credit score: The most impactful personal factor. Borrowers with 740+ scores get the best rates. Each tier below that adds roughly 0.125-0.5% to your rate depending on the lender and market.
• -Down payment: A larger down payment reduces the lender's risk. Putting 20% or more down typically qualifies you for better rates and eliminates PMI.
• -Debt-to-income ratio: Lower DTI signals that you can comfortably manage the payment. Lenders reserve their best rates for borrowers with DTI below 36%.
• -Loan type and term: 15-year mortgages carry lower rates than 30-year loans. Conforming loans (under the FHFA limit) get better rates than jumbo loans. Government-backed loans (FHA, VA) have their own rate structures.
• -Property type and use: Primary residences get the best rates. Investment properties and second homes typically carry rates 0.25-0.75% higher.

See how different rates affect your monthly payment and total interest with the mortgage payment calculator.

Fixed-Rate vs. Adjustable-Rate Mortgages

Fixed-rate mortgages

A fixed-rate mortgage locks your interest rate for the entire loan term — typically 15 or 30 years. Your principal and interest payment never changes, making budgeting predictable. The trade-off is that fixed rates are higher than the initial rate on an ARM. Fixed-rate mortgages are the right choice when rates are low, you plan to stay long-term, or you value payment stability above all else.

Adjustable-rate mortgages (ARMs)

An ARM offers a lower fixed rate for an initial period (commonly 5, 7, or 10 years), then adjusts periodically based on a benchmark index plus a margin. A "5/1 ARM" is fixed for 5 years and adjusts annually after that. A "7/6 ARM" is fixed for 7 years and adjusts every 6 months.

ARMs have caps that limit how much the rate can increase: the initial adjustment cap (how much it can move at the first adjustment), the periodic cap (maximum change per adjustment period), and the lifetime cap (maximum total increase over the initial rate). A common cap structure is 2/1/5, meaning the rate can rise up to 2% at the first adjustment, 1% per period after that, and 5% total over the life of the loan.

ARMs make sense if you plan to move or refinance before the fixed period ends, or if current fixed rates are high and you expect rates to drop. Compare both options with the mortgage comparison calculator to see the real cost difference.

How to Shop for the Best Rate

Shopping for a mortgage rate is one of the most financially impactful things you can do. Studies show that borrowers who get quotes from at least three lenders save an average of $1,500 over the life of their loan — and some save much more.

Get multiple Loan Estimates

Apply to at least three lenders within a two-week window. Each must provide a standardized Loan Estimate within three business days. This document shows the interest rate, APR, estimated monthly payment, closing costs, and other key terms in a consistent format that makes comparison straightforward.

Compare APR, not just the rate

The interest rate tells you the cost of borrowing the principal. The APR includes the rate plus lender fees and points, giving you the true annual cost. A lower rate with high fees can be more expensive than a slightly higher rate with low fees. Always compare APR for an apples-to-apples view. Plug the numbers into our mortgage comparison calculator to see total costs side by side.

Negotiate with leverage

Once you have multiple quotes, use them as leverage. Show your preferred lender a competitor's better offer and ask them to match or beat it. Many lenders will adjust their pricing to win your business. Focus your negotiation on the origination fee and rate — these have the biggest impact on total cost.

Rate Lock Strategies

A rate lock guarantees your quoted interest rate for a specified period — typically 30, 45, or 60 days — protecting you from rate increases between application and closing.

When to lock

Lock your rate when you have an accepted offer and are comfortable with the quoted rate. Waiting to see if rates drop is a gamble — they could just as easily go up. If you are refinancing and the timeline is within your control, you have more flexibility to watch rates before locking. Most financial advisors recommend locking as soon as you are satisfied with the rate rather than trying to time the bottom.

Lock period length

Shorter lock periods (30 days) typically come with lower rates, but you risk the lock expiring if closing is delayed. Longer locks (60-90 days) cost slightly more but provide a safety margin. Match your lock period to your expected closing timeline plus a buffer of at least a week.

Float-down options

Some lenders offer a float-down option that lets you take advantage of lower rates if the market drops after you lock. This usually costs a small fee (0.125-0.25% of the loan amount) or is built into a slightly higher initial rate. It is worth considering when rates are volatile and you are locking for a longer period.