How Are Mortgage Rates Determined?

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The Federal Reserve and mortgage rates have a very close relationship. However, two concepts exist about mortgages that many people don't always understand. The first is how mortgage rates are determined, followed by how those mortgage rates are affected when the U.S. Federal Reserve Bank issues rate changes.

Even if you don't fully understand these concepts, you still stand to get a good rate on your home loan. In challenging markets with changing interest rates, however, it helps to know the basics so you can look out for your own financial welfare.

How Bonds Affect Mortgage Rates

Contrary to popular belief, mortgage rates are not based on the 10-year Treasury note. They're based on the bond market, meaning mortgage bonds or mortgage-backed securities. When shopping for a new home loan, many people jump online to see how the 10-year Treasury note is doing, but in reality, mortgage-backed securities drive the fluctuations in mortgage rates.


In fact, it is not unusual to see them move in completely different directions and, without professional guidance, that confusing movement could cause you to make make a poor financial decision.

Mortgage-backed securities are mortgage loans packaged into groups or bundles of securities and then sold in the bond market. The price of these bundled debt securities is driven by national and global news events, which also affect individual mortgage rates.

The graph below illustrates the 30-year fixed mortgage rate average from 2000 through today:

How the Fed's Actions Affect Mortgage Rates

When the Fed cuts interest rates, especially by a large or repeated percentage-point drop, people automatically assume that mortgage rates will fall.

But if you follow mortgage rates, you will see that most of the time, the rates fall very slowly, if at all. Historically, when the Feds have dramatically cut rates, mortgage rates remain almost identical to the rates established months before the cut as they do months after the cut. The Fed’s moves aren’t totally irrelevant, though. They tend to have a delayed and indirect impact on home loan rates.

For example, when investors worry about inflation, this concern will push rates up. When Congress wants to stimulate action and raise money for a deficit, it will create more U.S. Treasuries for folks to buy. This added supply of new Treasuries can also cause mortgage rates to move higher.

Even more crucial is when a buyer is in the process of making a decision whether to lock a loan just before a Fed rate cut. Say a buyer is in a contract and is thinking the Fed is going to lower rates next week. The buyer might be tempted to wait before locking the loan—big mistake.

When the Fed makes that big drop, say by 50 basis points or more, it actually can cause 30-year-fixed rates to initially spike. But then over time the rates generally level out or regain their losses—depending, of course, upon current market trends. So, if a buyer is within three weeks of closing before an anticipated Fed cut, it's usually recommended to lock in ahead of the Fed rate cut to protect that original good interest rate.

Understanding APR

You'll likely see APR any time you're looking at mortgage rates. APR stands for "annual percentage rate." It's the interest rate that's applied to your monthly mortgage payment, plus additional fees. Say your monthly house payment has an interest rate of 4.75%, but your loan's APR is 5%. The difference is due to upfront or ongoing fees.

Calculating a Mortgage Rate

Interest rates on home loans are built up using an index based on the current market, such as the bond market, and a markup that represents the lender's profit. If you're looking at published rates, note that they tend to represent an average, and you may find that rates in your specific geographical area vary.


The rates you're offered will also be impacted by your credit score range. Lenders price your mortgage loan based on your risk profile.

If you have a great credit score, it's much less likely statistically that you'll default on your loan, so you'll get a lower interest rate. If you have a lower credit score, your lender will want more interest to compensate for the additional risk of you defaulting on the loan, so you'll have to pay a higher interest rate. Use the mortgage rate calculator below to get a sense of what your monthly payment could end up being.

The Bottom Line

Mortgage rates are not as straightforward as they seem. Multiple economic and regulatory factors can influence when they rise and fall: Treasurys, mortgage-backed securities, Fed rate cuts, and more. While average homeowners don't need to be experts about what affects mortgage rates, it does help to understand the influences behind them.

What really matters is how mortgage interest rates affect you when it's time to buy. Remember that your interest rate (high or low) is different from your APR. You want there to be as small a gap between your interest rate and APR as possible, as a bigger gap indicates more rolled into the loan.
And while you're shopping for a loan, remember that rates you see are often an average or a rock-bottom rate offered only to those with excellent credit, income, and debt metrics.

Frequently Asked Questions (FAQs)

What are the average mortgage rates today?

Mortgage rates regularly fluctuate, so the average rate today might not be relevant next week, next month, or next year. The best way to get a sense of the current mortgage rate environment is to check the mortgage data maintained by the Federal Reserve Bank of St. Louis. Those charts offer daily and weekly snapshots of various mortgage averages, including the average 15-year and 30-year fixed mortgage rates, as well as details on origination fees and discount points.

How low can mortgage rates go?

In theory, there's no limit to how low mortgage rates could go, because central banks could introduce negative rates into the bond market. In reality, there is a floor at which financial institutions would no longer find it profitable to offer mortgages as a loan product, but each lender has to make that decision for themselves. According to the Federal Reserve, the average 30-year fixed-rate mortgage dropped to an all-time low of 2.65% in January 2021.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. "Mortgage-Backed Securities and Collateralized Mortgage Obligations."

  2. FRED, Federal Reserve Bank of St. Louis. "Federal Funds Effective Rate."

  3. FRED, Federal Reserve Bank of St. Louis. "30-Year Fixed Rate Mortgage Average in the United States."

  4. Consumer Financial Protection Bureau. "What Is the Difference Between a Mortgage Interest Rate and an APR?"

  5. Consumer Financial Protection Bureau. "How Does My Credit Score Affect My Ability To Get a Mortgage Loan?"

  6. FRED, Federal Reserve Bank of St. Louis. "30-Year Fixed-Rate Mortgage Average in the United States."

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