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Your mortgage rate will be one of the biggest impacts you'll feel financially as a homeowner, and there are several factors — both within and outside of your control — that can determine it. From the federal fund rate to inflation to your credit score, here's what affects mortgage rates and how to ensure you secure the lowest one.

Read more: See the mortgage lenders with the best rates this week.

What is a mortgage interest rate, and why does it matter?

Your mortgage interest rate is the price your mortgage lender charges to issue your home loan.

"Interest compounds over 30 years into tens of thousands of dollars, said Chloe Shubin vice president of operations and strategy at Griffin Funding, via email. "If one buyer locks in a rate that's half a percent lower than another buyer buying the same home, they will pay significantly less over the life of their loan — that's why it's important to know what causes mortgage rates to change before you sign your loan documents."

Suppose you buy a $500,000 house, put $100,000 down, and finance the remaining $400,000 with a 30-year fixed-rate mortgage. Here's what your monthly mortgage payment would look like at five different interest rates:

Monthly payment by mortgage rate

Please note: The above figures only represent mortgage principal and interest payments and don't include property taxes, homeowners insurance premiums, or other related costs.

As you can see, your rate significantly impacts your monthly housing bill. Plus, if you keep your mortgage for the entire term, a higher rate can cost you tens or hundreds of thousands of dollars more over the life of the loan.

Read more: How PITI (principal, interest, taxes, and insurance) affects your mortgage payments.

A brief history of mortgage interest rates

Mortgage interest rates are constantly in flux and can change multiple times daily. Here's a snapshot of the last several years, including the 30-year mortgage interest rate Freddie Mac listed for the beginning of each month:

While today's rate is higher than the all-time lows during the peak of the COVID-19 pandemic in 2020 and 2021 — and rates may never drop to the 3% range again — it's nowhere near the historic peak of 18.63%, which impacted borrowers in October 1981.

Rates have obviously decreased since then. The latest forecast fromgovernment-sponsored enterprise Fannie Mae predicts mortgage rates will hover around 6% through the end of 2026.

Read more: Discover how to get a mortgage rate under 6%.

What determines mortgage rates overall?

Several external factors influence mortgage rates. You can't control these components, but understanding them can help you understand why rates are trending a certain way and know how they could change. Let's take a look at some of the major issues that affect mortgage rates.

The federal funds rate

The Federal Reserve adjusts the federal funds rate to cool a booming economy (by raising rates) or stimulate a slow one (by lowering rates).

"When the federal funds rate — what banks charge each other for overnight loans — goes up, mortgage interest rates generally follow suit," said Jeanine Thomas, principal broker at Sarasota Mortgage Group LLC, via email. "This pattern holds true for [benchmark interest rates like] the Secured Overnight Financing Rate and the Constant Maturity Treasury rate as well."

The federal funds rate doesn't directly impact mortgage rates, but the two are closely tied. Adjusting the funds rate can shape investors' expectations for future returns, which can ultimately influence rates lenders charge on consumer loans, including mortgages.

Generally, when the Fed raises the benchmark rate to curb inflation, overall borrowing costs rise, driving mortgage rates higher. And when the Fed cuts rates, mortgage rates fall.

However, because other factors influence mortgage rates, like market expectations, the two don't always move in lockstep. For example, mortgages stayed relatively stagnant even after multiple rate cuts in 2024, primarily because investors already anticipated the rate cut or believed it wouldn't be enough to slow inflation.

Read more: Learn how the Federal Reserve rate decision affects mortgage rates.

Demand for mortgage-backed securities

A mortgage-backed security is an investment vehicle that pays investors a portion of the principal and interest payments made by the mortgage holders in a collection of home loans.

A government or private entity purchases home loans from mortgage originators. Then, that entity issues securities, or the rights to the principal and interest payments, to investors. Most mortgage-backed securities are issued by Fannie Mae and Freddie Mac, which are two U.S. government-sponsored enterprises (GSEs).

"When there's a strong appetite for mortgage-backed securities, mortgage rates are typically lower," said Shubin. "If demand for mortgages eases among investors, lenders increase mortgage rates to make their product more appealing."

The 10-year Treasury yield

The 10-year Treasury measures long-term interest rates. You can buy 10-year Treasury notes, bonds, and bills, which are all types of safe investments, just for different term lengths.

But the 10-year Treasury yield is also a good indicator of how rates on longer-term loans — like mortgages — are moving. If the 10-year Treasury yield goes down, mortgage interest rates tend to decrease too. By looking at 10-year Treasury yield predictions, you can get a decent idea of what mortgage rates could do over the next five years.

Inflation

At its core, inflation results in increased prices and decreased purchasing power.

"The mortgage rate is affected primarily by inflation," said Cody Schuiteboer, president and CEO of Best Interest Financial, via email. "In cases of high inflation, the investors ask for higher rates to cover the losses due to inflation, raising the mortgage rates in turn."

Conversely, lenders will usually keep interest rates low when inflation is low because the institution's money stretches further.

Read more: Dive into how inflation impacts mortgage rates.

The overall economy

It makes sense that the economy at large plays a role in determining mortgage rates. Inflation, employment — these are all individual parts of the economy that affect rates.

"The economy affects mortgage rates a lot. When more people have jobs and make more money, they feel better about buying homes, which can push up mortgage rates because more people want loans. But in a weak economy where few people have jobs and wages stay the same, fewer people want mortgages, so rates can go down," said Thomas.

Basically, a weak economy generally leads to lower rates, and a strong economy results in higher rates.

Government rules and programs

Government assistance can also impact mortgage rates. "Programs that help people buy homes, like tax breaks or affordable housing loan programs, can make more people want mortgages, which might raise rates," Thomas said.

She also explained that new government plans and laws might help keep rates low if they provide money for home loans. On the other hand, they can increase mortgage rates if they encourage more people to buy houses and drive up demand.

Read more: Learn how the national debt impacts the housing market.

World events

The American economy and news cycle aren't the only things that impact mortgage rates — rates can be affected by global events too.

"If other countries have problems with their economies, investors might put money into safe things like the U.S. Treasury bonds, which can lower mortgage rates here," said Thomas. "But when global markets are steady, rates might go up because more investors are interested in bonds and mortgages." She points out that elections or tensions between other nations might make investors choose to put their money in low-risk assets, like U.S. bonds, which can lead to lower rates.

Read more: Does the president influence mortgage rates?

What determines your mortgage rate?

External forces converge to set mortgage baseline rates. However, your loan details, financial standing, and new property information refine that baseline, resulting in a custom borrowing cost. These are factors you do have some control over. We'll examine those elements more closely.

Your mortgage loan

Your mortgage itself has a significant impact on your interest rate. Here's how each characteristic contributes to it:

  • Term length: A shorter-term mortgage usually has a lower interest rate — for example, you'll get a lower rate with a 15-year term than a 30-year one.

  • Type of mortgage: An FHA loan generally has a lower interest rate than a conventional mortgage. However, it often comes with higher mortgage insurance costs that are difficult to cancel. It's crucial to weigh all the costs — not just the interest rate — when shopping for a mortgage.

  • Loan amount: A larger loan might have a higher interest rate because the lender takes on greater risk.

  • Down payment: A higher down payment will likely result in a lower interest rate because the lender assumes less risk.

  • Fixed vs. adjustable rate: In the past, adjustable rates started lower than fixed rates. However, fixed-rate mortgages have been the better deal lately. Ask prospective lenders to see both offerings.

  • Closing costs: Rolling your closing costs into your mortgage (rather than paying them in a lump sum on closing day) may result in a higher interest rate because you're borrowing more money and putting less financial skin in the game up front.

Thomas also pointed out that you can buy mortgage discount points to lower your rate. Typically, a discount point costs 1% of your loan and lowers your mortgage rate by 0.25%. So, if you have a $300,000 mortgage with a 7% rate and buy one discount point, you'd pay an extra $3,000 at closing and have a 6.75% rate.

Read more: Learn 8 strategies for getting the lowest mortgage rates.

Your financial standing

Thomas noted that a higher credit score can help you get a lower interest rate "... because it shows lenders you've managed debt responsibly in the past." In addition, a lower debt-to-income ratio (DTI) — a measure of how much you earn in relation to how much you owe monthly, expressed as a percentage — may yield a lower interest rate because less debt suggests you're able to afford mortgage payments and are a lower-risk borrower.

Your new property

"The type of property you're buying also matters," said Thomas. "Single-family homes usually have lower rates than condominiums, and primary residences generally get lower rates compared to second homes and investment properties."

Plus, your property's location can impact your interest rate. Your lender may offer different loan rates depending on your state and even your county.

Rate variation by mortgage lender

Mortgage lenders start with the baseline, consider the individual borrower's situation, and then may further adjust the rate based on the financial institution's circumstances. For instance, "...larger banks typically face higher operational costs, while smaller lenders may have lower expenses, allowing them to offer lower rates to borrowers. [In addition], during periods of high demand, banks may raise rates to handle [the] increased workload efficiently," said Thomas.

"The rates offered to borrowers can vary significantly between lenders due to variations in the profit margins they incorporate into their rates, creating interest rate differences by several percentage points," Thomas continued. "Mortgage brokers often shop around among lenders to secure competitive rates through wholesale lending."

See our top picks for mortgage lenders for first-time home buyers.

Securing the best mortgage interest rate

No matter what's happening in the housing market, there are steps you can take to get the best possible mortgage interest rate. "Focus on improving your credit score by reducing debts and paying bills on time. Saving for a larger down payment can also enhance your eligibility," said Thomas.

You can also shop around, getting quotes from multiple mortgage lenders. However, mortgage rates aren't the only costs that matter, though. You should also look at mortgage lenders' fees when comparing companies.

"Consider the overall cost associated with the advertised interest rate, including origination fees, application fees, and discount points," said Thomas. "For example, a lower advertised rate may not be the best option if the origination fees are higher, especially if the borrower plans to stay in the property for only a few years. Conversely, if the borrower intends to make this a long-term residence, the lower rate and higher fees may better serve them."

Read more: What's the difference between your mortgage APR and interest rate?

How are mortgage rates determined? FAQs

Are mortgage rates and refinance rates the same?

Refinance rates can be a bit higher than a mortgage purchase loan, primarily because lenders view refinancing as slightly riskier. Higher rates help to offset this risk.

When should you lock in your mortgage interest rate?

Locking in your mortgage interest rate guarantees it won't change before you close on your house. Because most rate locks last 30 to 60 days, the goal is to lock in the mortgage rate early enough to avoid rising rates, but not so early that your rate lock expires before you can close on the loan. You may find it's easiest to lock in once you're under contract — meaning the seller accepted your offer and you have a set closing date.

Can you change your mortgage interest rate?

You can change your mortgage rate during the home-buying process by paying for mortgage discount points. For every 1% of your loan (one point) you pay up-front, your lender will reduce your interest rate by a certain amount. After you close on your original home loan, you may be able to lower your interest rate by refinancing the debt. Your rate will also change periodically if you have an adjustable-rate mortgage (ARM) rather than a fixed-rate one.