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What Are Mortgage Rates and How Do They Work?

Your mortgage rate is what you’ll pay to borrow money from your lender. But there are several ways you can influence your rate and get a better deal.

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By Aly J. Yale

Written by

Aly J. Yale

Writer

Aly J. Yale is a personal finance journalist with over 10 years of experience. Her work has been featured by Forbes, Fox Business, The Motley Fool, Bankrate, and The Balance.

Edited by Reina Marszalek

Written by

Reina Marszalek

Senior editor

Reina Marszalek has more than 10 years of experience in personal finance. She is a senior mortgage editor at Credible and Fox Money.

Updated September 27, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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If you want the best deal on your home purchase, then comparing loan offers is critical. But loan estimates are filled with many facts, figures, and calculations which can be complicated — particularly if you’re a first-time homebuyer.

Don’t let all those numbers overwhelm you, though. As long as you understand the mortgage rate you’re getting, then you have a good foundation on which to compare your loan offers.

What are mortgage rates?

A mortgage rate reflects how much you’ll pay to take out the loan. It’s the interest you’ll owe annually which will be a percentage of your loan’s total balance.

There are both fixed-rate and adjustable-rate mortgage loan options. With fixed rates, your interest is consistent throughout the entire course of your loan.

Use a mortgage calculator to determine how your rate will affect your monthly payment.

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Example:

A lender quotes you a 7% fixed mortgage rate on a $300,000 loan. This means you’ll pay 7% of your loan balance every year until you sell the home, refinance, or pay it off.

If you have an adjustable-rate loan, your interest rate can fluctuate after a certain amount of time, sending your monthly payment up or down with it. The 5/1 ARM is one of the most popular forms of adjustable-rate mortgages. This gives you a set interest rate for the first five years, then the rate adjusts once per year after that.

Compare mortgage rates

Keep Reading: 30 Mortgage Terms to Know: Ultimate Glossary for Homebuyers

What mortgage rates are determined by

Lenders set mortgage rates on a borrower-by-borrower basis. They take into account larger economic factors, as well as the borrower’s personal financial situation.

Here’s a breakdown of what is typically considered:

Larger economic factors
Personal economic factors
  • Strength of the economy
  • Inflation rates
  • Employment
  • Consumer spending
  • Housing construction and other market conditions
  • Stock and bond markets
  • 10-year Treasury yields
  • Federal Reserve policies
  • Credit score
  • Credit history
  • Down payment size
  • Loan-to-value ratio
  • Loan size, type, and term
  • Debt-to-income ratio
  • Location of the property

Larger economic factors

The bigger financial picture plays a big role in what rates mortgage lenders are able to offer. The strength of the economy, inflation rates, employment numbers, and things like consumer spending, construction, and the stocks and bonds markets all play a role. The 10-year Treasury yield, which is how much investors make on federal bonds and notes, also plays a role. As yields rise, so do fixed-rate mortgage rates (and vice versa).

Learn More: Mortgage Rate Lock

Personal economic factors

It’s not all external, though. Your own personal financial scenario will also impact what mortgage interest rates you’ll be offered. Your credit score will be a big influencer, as will things like your down payment size, the amount of money you’re borrowing, your income, and more.

Generally, to get the lowest interest rate, you should have a:

  • Credit score of 760 or above
  • A down payment of 20% or more
  • Low loan-to-value ratio (low loan balance compared to the home’s value)
  • Low debt-to-income ratios (low total debts compared to your total household income)

Whether or not you choose to buy discount points will also impact your rate. Discount points work as sort of a tradeoff: You pay your lender an upfront fee and, in exchange, they give you a lower interest rate on your loan.

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Be careful here.

You’ll need to make sure you stay in the home long enough to reach the break-even point — when your lower interest rate saves you more than you paid your lender for those points at closing.

Learn More: APR vs. Interest Rate: Understanding the Difference

Mortgage rates are personal and can change between lenders

Mortgage rates aren’t cut and dry. While economic conditions and your finances play a role, so does the lender you choose. Keep in mind that you can also influence your rate by paying points, so be sure to factor this in when comparing your loan options.

Find Out: How to Negotiate a Better Mortgage Rate

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Meet the expert:
Aly J. Yale

Aly J. Yale is a personal finance journalist with over 10 years of experience. Her work has been featured by Forbes, Fox Business, The Motley Fool, Bankrate, and The Balance.