A woman looking possibly looking at her good investments in real estate on laptop.

How Are Mortgage Rates Determined? A Comprehensive Look At Mortgage Interest Rates

Jun 27, 2024



Mortgage interest rates are a primary concern when buying a home. A lower interest rate makes for lower mortgage payments while a higher rate can make it more challenging to find an affordable monthly payment, or even get approved for a home loan.

But how are mortgage rates determined? And what can you do to make sure you get the lowest possible rate from a reliable and trustworthy mortgage lender?

FAQs About Mortgage Interest Rates

Here are the answers to a few FAQs about mortgage rates.

What determines the interest rate on a mortgage?

Interest rates on a mortgage loan are determined by personal and market factors such as credit history, income, down payment, inflation, and bond yield fluctuations.

Why do mortgage rates change?

Mortgage rates change as the market shifts. If the economy is growing, mortgage rates increase. If the economy is slowing down, interest rates decrease.

Can I negotiate my mortgage rate?

Mortgage rates are negotiable to a certain extent. You can start by getting several mortgage quotes. Having a higher credit score and higher down payment can help your odds of negotiating a lower interest rate.

How does my down payment impact my rate?

A significant down payment typically allows you to enjoy a lower interest rate. A larger down payment also lowers your monthly mortgage payment.

See What You Qualify For

Get Started

What Determines Mortgage Rates?

Several factors affect how mortgage rates are determined today, but you can only control one aspect: your personal qualifying factors for a mortgage. Lenders look at your credit score, income, debt-to-income (DTI) ratio, assets and other financial information to determine your risk level. The better your qualifying factors, the better the interest rate you may be offered.

Mortgage rates are also affected by the overall economy and the interest rates set by the Federal Reserve. When the economic outlook is good, rates tend to increase, and rates fall when it’s not so great. It seems somewhat backward, but here’s the reasoning.

When the economy is doing well, borrowers can afford more. This affects the market for mortgages, which results in rising loan rates.

Conversely, when the economy declines and unemployment rates increase, interest rates fall to make it more affordable for borrowers to take out loans.

Frequency Of Interest Rate Changes

Every day, banks receive rate sheets. This doesn’t mean rates change daily, but they can. In fact, they can change multiple times a day. If you have your eye on an interest rate, it’s best to talk to your mortgage lender about locking in a lower interest rate before it rises.

15-Year Vs. 30-Year Mortgage Rates

If you can afford a 15-year mortgage with its higher payment, you’ll get a lower interest rate. That’s because it costs more to lend money for 30 years versus 15 years. If mortgage lenders can receive their money back in half the time (15 years), they’ll reward borrowers for it with lower interest rates (which results in you paying much less total interest).

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

Which Market Factors Affect Mortgage Rates?

Market factors are some of the largest driving forces behind mortgage rates. The Federal Reserve, bond market, Secured Overnight Finance Rate, Constant Maturity Treasury and the health of the economy and inflation all affect mortgage rates.

The Federal Reserve

Many people assume the Federal Reserve (the Fed) sets mortgage rates. They don’t, but the Federal Reserve does influence rates. The Fed controls short-term interest rates by increasing them or decreasing them based on the state of the economy. While mortgage rates aren’t directly tied to the Fed rates, when the Fed rate changes, the prime rate for mortgages usually follows suit shortly afterward.

The Federal Reserve manages short-term interest rates to control the money supply. When the economy is struggling, the Fed lowers rates. These aren’t the rates given to consumers, but the rates at which banks can borrow money to lend to consumers.

When the Fed decides they need to make adjustments to stabilize inflation, stimulate economic growth or manage asset bubbles, they raise the Fed rate. While this doesn’t directly increase mortgage rates, eventually, banks and lenders must adjust to keep up with their costs to borrow money from the Fed.

The Bond Market

Mortgage rates have a reputation of being tied to the 10-year U.S. Treasury note, but they’re actually tied to the bond market.

Mortgage-backed securities, or mortgage bonds, are bundles of mortgages sold on the bond market. How bonds affect mortgage rates depends on their demand. When the price of mortgage bonds is high, mortgage rates decrease, and when the price is low, mortgage rates increase.

The Secured Overnight Finance Rate

The Secured Overnight Financing Rate (SOFR) is an interest rate set based on the cost of overnight borrowing for banks. Lenders often use it to determine a mortgage’s base interest rate, depending on the type of home loan. It’s grown in popularity to serve as the replacement for the London Interbank Offer Rate (LIBOR), which was phased out at the end of 2021.

The Constant Maturity Treasury Rate

Constant Maturity Treasury rates, or CMT rates, refer to a yield that’s calculated by taking the average yield of different types of U.S. Treasury securities with varying maturity periods, and using it to adjust for a number of time periods.

Some mortgage lenders will use this rate to determine interest for adjustable-rate mortgages (ARMs). If the CMT rate goes up, you can expect any loans tied to it to increase their interest rates as well.

The State Of The Economy

Mortgage rates vary based on how the economy is doing today and its outlook. When the economy is doing well – meaning unemployment rates are low and spending is high – mortgage rates increase. When the economy isn't doing as well, like when unemployment rates are high and the demand for oil is low, mortgage rates fall.


Mortgage rates and inflation go hand in hand. When inflation increases, interest rates increase so they can keep up with the value of the dollar. If inflation decreases, mortgage rates drop. During periods of low inflation, mortgage rates tend to stay the same or slightly fluctuate.

See what you’re eligible for.

Rocket Mortgage® uses information about your income, assets and credit to show you which mortgage options make sense for you.

What Personal Factors Affect Mortgage Rates?

Economic factors aside, many personal factors affect the par rate, or the interest rate a mortgage lender will give you. Lenders have interest rates they can charge for the “best borrowers,” and they adjust rates for the “riskier borrowers.”

Fortunately, you can control your personal factors, which means you can work on getting the best mortgage rate possible.

Credit Score

A high credit score means you’re seen as less of a risk to lenders – you pay your bills on time and don’t keep a large balance on your credit cards. A lower credit score means your lender may charge you more interest for the loan to reduce their risk. When lenders pull your credit, you want them to see you as a responsible borrower with a low risk of mortgage default.

This leads lenders to give you a better interest rate – one that’s closer to the advertised rates because they don’t have to adjust for a low credit score. When you have a low credit score, lenders often change the interest rate significantly because you’re at a higher risk of default.

Determining what credit score you need to buy a house depends on the loan program. If you want a conventional loan (meaning it won’t be government-backed), you’ll typically need at least a 620 credit score. If you choose FHA or VA financing, you’ll often need a credit score of 580 or higher, though it is possible to qualify in various cases with a lower score.

Taking the steps to check and improve your credit will put you in a better position to get a lower rate from your lender.

Down Payment

Lenders want to know that you’re invested in the home through a down payment and that you aren’t borrowing 100% of the funds. The more money you have invested in the home, the lower your loan-to-value ratio (LTV), which means less risk for the lender.

Lenders charge higher interest rates when the risk of default increases, which is also the case with low down payments. For example, if you make a 3% down payment on a $200,000 loan, you put down $6,000. But if you make a 20% down payment on a $200,000 loan, you put down $40,000. There’s a big difference between losing $6,000 and $40,000. Lenders usually give a borrower with the larger down payment a lower interest rate.

If you put down less than 20% on a home purchase, your mortgage rate may increase and you’ll often need to pay mortgage insurance. There are different types of insurance depending on your loan program; some are eventually cancellable, while others aren’t.


Mortgage lenders care about whether your home is your primary residence, a second home or an investment property. Interest rates are usually lowest on primary residences because it’s where you live. You’re more likely to make your monthly payments on time because you don’t want to lose your home.

If you have a second home or investment property and experience financial issues, you’re more likely to default on the mortgage, putting the lender at risk. Most lenders charge higher mortgage rates to make up for this risk.

How Can I Estimate My Mortgage Rate?

You can view today’s interest rates to see where you might fall. If you aren’t sure what type of loan you’d qualify for, consider getting initial approval to determine where you fall. But if you know your credit score and your approximate LTV ratio, you can estimate your interest rate using current mortgage rates.

The Bottom Line: Mortgage Rates Are Determined By Many Factors

Market and personal factors determine your mortgage rate, which will strongly influence the amount of your monthly payment. While you can’t do anything about market conditions, you can control the qualifying factors lenders consider when you’re applying for a home loan.

Improving your credit score and saving for a larger down payment are two of the best ways to boost your chances of securing the best mortgage rates. Do you have your finances in good shape and feel ready to lock in your rate? Begin the approval process today with Rocket Mortgage®.

Headshot of Erin Gobler, freelance personal finance expert and writer for Rocket Mortgage.

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Money and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.