Homebuyers

What is a Mortgage Rate?

January 6, 2026

You’re probably familiar with the term “mortgage rates.” Maybe you’ve done some online deep dives into what current rates are or even tracked their daily movements.

But, what exactly is a mortgage interest rate and why does it matter so much in the home loan process? Even small differences in your rate can translate into thousands of dollars over the life of your loan.

Below is everything you need to know about mortgage rates, including what they are, how they are calculated, and how to get the best rate for your situation.

Whether you’re a first-time homebuyer or looking to refinance your existing mortgage, understanding mortgage rates can help you navigate the home loan process.

What is a mortgage rate?

A mortgage rate is a type of interest rate that is charged to a borrower for a home loan. It’s the annual percentage of interest a borrower will pay on the money they borrow to purchase or refinance a home.

When you take out a mortgage, you’re not just paying back the amount you borrowed (which is called the principal), you’re also paying interest to the lender for the privilege of using their money.

Think of it as the cost of borrowing money, expressed as a yearly rate and then paid off each month.

The higher the mortgage rate, the more money it will cost to borrow the amount you need to buy a home or refinance.

Let’s say you borrow $400,000 to buy a home with a 6.2% interest rate on a 30-year fixed-rate loan. That means that you’ll pay back the amount you borrow over 30 years and the interest rate will remain constant throughout the life of the loan.

Over the life of the loan, you will pay $481,955 in interest beyond the $400,000 in principal that you borrowed.

That’s why the mortgage rate is so important. Even small drops in mortgage rates can dramatically decrease the amount of interest you will end up paying.

How are mortgage interest rates determined? What causes them to change?

Mortgage rates over time are constantly changing. Even during the day, rates can move up or down.

Rates don’t exist in a vacuum, however. They’re influenced by a complex mix of economic forces. Rates can also vary depending on the borrower’s financial profile, the type of home loan they’re using, the property in question, and many other factors.

Let’s look at each part of the equation and how it influences rates.

Economic factors

These are the big-picture forces that shape mortgage rates. They include U.S. Federal Reserve monetary policy, the bond market and investor activity, inflation, overall economic conditions, and housing market conditions, among others.

The Fed plays a significant role in influencing mortgage rates. The Fed sets what is called the Federal Funds rate, which is the interest rate that banks charge each other for overnight loans. While the Federal Funds rate doesn’t impact mortgage rates directly, it can influence which direction mortgage rates move.

When the Fed raises its rates to combat inflation, it can lead to higher mortgage rates.

When the Fed cuts rates to stimulate the economy, mortgage rates tend to decline.

However, it’s important to know that mortgage rates don’t always move in lockstep with the Fed’s decisions. Mortgage rates are also influenced by other factors.

The bond market and 10-Year Treasury yield

Mortgage rates are more directly tied to the yield on 10-year U.S. Treasury bonds. When you hear financial news about “the bond market,” it’s often more relevant to your mortgage rate than Fed announcements.

Here’s why: Most lenders do not hold mortgages on their books because they need the money to make new loans. They sell these loans on the secondary market, including to mortgage giants Fannie Mae and Freddie Mac. This allows lenders to continue making new loans.

These loans are bundled into mortgage-backed securities that are sold to investors.

When Treasury yields rise, mortgage rates typically follow because lenders need to offer competitive returns to attract investors. When Treasury yields fall, mortgage rates often decline.

Inflation

Inflation significantly impacts mortgage rates. When inflation is high, lenders charge higher interest rates to protect the purchasing power of the money they'll be repaid in the future.

Economic growth and employment

When the economy is strong and unemployment is low, mortgage rates tend to increase. That’s because more people are buying homes and competing for loans.

Conversely, weakness in the economy or rising unemployment typically leads to lower mortgage rates. The Fed tries to stimulate growth, often by cutting the Federal Funds rate, and fewer people are in the market for homes.

Housing market conditions

The basic economic tenet of supply and demand in the housing market affects rates as well.

When demand for mortgages is high, lenders can charge higher rates. When demand decreases, lenders often lower rates to attract more borrowers.

How can I get the best mortgage rate? What factors affect my individual rate?

While you can’t control the economy or the Fed, your mortgage rate is also directly affected by several factors that are unique to each borrower.

Credit score

Your credit score is one of the most important parts of the mortgage rate equation. Lenders use it as a predictor of how likely you are to repay the loan on time. The higher your score, the lower your perceived risk, and the better your rate.

Down payment and Loan-to-Value (LTV) ratio

The size of your down payment directly affects your rate through your loan-to-value ratio (LTV). This is how much your loan amount is compared to the value of the home.

In simple terms, if you have a 10% down payment, your LTV ratio would be 90%. If your down payment is 20%, your LTV ratio would be 80%, and so on.

The more you’re able to put down, the lower your rate will likely be as you’ve directly shown your lender that you are making a significant financial investment in the property.

Debt-to-Income Ratio (DTI)

This is a representation of your income compared to how much debt you carry. Your DTI is your total monthly debt payments divided by your gross monthly income.

Lenders use this to assess whether you can comfortably afford your mortgage payment along with your other debts.

The lower your DTI, the lower your rate will likely also be.

Loan type

The type of loan you are getting also directly impacts your mortgage rate.

Whether it’s a fixed-rate loan, an adjustable-rate mortgage (ARM), a Conventional loan, a Jumbo loan, a Federal Housing Administration (FHA) loan, a Department of Veterans Affairs (VA) loan, or other type, the kind of loan will affect your mortgage rate.

Generally, FHA and VA loans offer lower mortgage rates than Conventional loans.

Refinance mortgage rates may be a little higher than rates for purchase loans.

Loan term

The length of your loan also plays a role in your mortgage rate. Typically, 15-year mortgage rates are lower than 30-year mortgage rates. However, shorter loans typically come with higher monthly payments. Longer terms have higher rates but lower monthly payments.

Why is that? Lenders charge more in interest for lengthier loans because their money is tied up longer and there’s more risk over a 30-year period compared to a 15-year period.

Types of mortgage rates

Not all mortgage rates work the same. The two main types are fixed-rate and adjustable-rate. Each has its own distinct advantages.

Fixed-rate mortgages

A fixed-rate mortgage offers an interest rate that stays the same for the life of the loan, whether that’s 15 years, 30 years, or somewhere in between. The 30-year fixed-rate mortgage is the most popular type of loan.

With a fixed-rate mortgage, once you lock in your rate, your principal and interest payment remain constant each month. This is the bulk of your monthly payment. Only the portion that goes toward property taxes or insurance fluctuates. This makes budgeting for the future much easier.

Adjustable-rate mortgages (ARMs)

An adjustable-rate mortgage has an interest rate that changes over time. ARMs typically start with a lower fixed rate for an initial period, then adjust periodically, up to a certain cap.

ARMs are described using two numbers, like “5/1” or “7/1.” The first number indicates how many years initial fixed rate lasts. The second number shows how often your rate adjusts after that initial period. A “1” means it will update each year. So, a 5/1 ARM has a fixed rate for the first five years, then adjusts once per year after that.

How to get a better mortgage rate

While you can’t control the economy, you do have some power when it comes to getting a lower mortgage rate.

Improve your credit score

This is often the best investment you can make. Even a few months of focused credit improvement can save you tens of thousands of dollars over the life of a home loan.

Save for a larger down payment

The larger your down payment, the better your rate will often be. You may also be able to avoid private mortgage insurance, which may be required if you put less than 20% down.

Reduce your DTI

Paying down your debt before you apply for a mortgage doesn’t just improve your chances of approval, it can also improve your rate.

Consider rate locks or buying points

If you’re planning to buy a home or refinance, you may to consider locking your interest rate. This guarantees your rate for a specific period, often 30 to 45 days, while your loan is in process. If rates rise during this time, you’re protected.

You can also consider buying down your mortgage rate by paying points upfront. One point equals 1% of the loan amount and typically reduces your rate by a quarter of a percentage point.

Some lenders offer buydown loan programs, which feature a lower introductory rate for the first few years of the loan.

Choose the right loan term

Don’t automatically assume that a 30-year mortgage is right for you. While it offers lower monthly payments, consider whether a 15-year term or other option makes sense.