Understanding Mortgage Rates: What Sets Yours
Mortgage rates are quoted as a single number, which hides the fact that two borrowers on the same day at the same lender routinely get quotes half a percentage point apart.
Understanding what drives the market rate and what drives your position within it is the difference between accepting a quote and negotiating one.
Key takeaways
- Mortgage rates track the 10-year Treasury yield more closely than the Fed funds rate.
- Credit score, LTV, loan type, term, occupancy and property type set your rate within the market range.
- Rate shopping within 45 days counts as a single credit inquiry.
- Discount points typically break even in 4–7 years; buy them only if you are certain you will stay.
What moves rates for everyone
Mortgage rates track the 10-year Treasury yield far more closely than the federal funds rate, which is a common source of confusion. The Fed sets an overnight rate; mortgages are long-duration instruments priced off long-term expectations.
The spread between the 10-year Treasury and the 30-year mortgage rate is typically 1.5–2 percentage points, widening when mortgage-backed securities demand is weak or prepayment risk is high. This is why rates sometimes rise after a Fed cut — the market had already priced the cut in, and the spread moved instead.
What moves your rate specifically
Six factors determine where you land within the available range on any given day.
- Credit score — the largest single factor; 740+ typically gets best pricing, 780+ marginally better
- Loan-to-value — 20% down prices better than 5%, and the tiers are discrete rather than continuous
- Loan type — conventional, FHA, VA and jumbo all price differently
- Term — 15-year loans typically price 0.4–0.6 points below 30-year
- Occupancy — primary residences price best; second homes and investment properties add 0.5–1 point
- Property type — condos and multi-unit properties carry pricing adjustments
Whether to buy discount points
One discount point costs 1% of the loan and typically reduces the rate by about 0.25 percentage points, though the exact trade varies daily and by lender.
Divide the point cost by the monthly payment reduction to get the break-even month — commonly 4 to 7 years. If you might sell or refinance before then, points lose money. For most buyers, applying the same cash to the down payment to cross an LTV threshold and eliminate PMI produces a better return than buying the rate down.
Locking, floating and float-downs
A rate lock fixes your rate for a set period, usually 30–60 days, protecting you if rates rise before closing. Longer locks cost more. Floating means accepting whatever the rate is at closing, which is a bet.
Some lenders offer a float-down provision allowing a one-time reduction if rates fall during the lock period, sometimes for a fee. If you lock early in a volatile period, ask about it explicitly — it is rarely offered unprompted.
Common questions
Why is my rate higher than the advertised rate?
Advertised rates assume an ideal borrower: excellent credit, 20%+ down, a primary single-family residence, a conforming loan amount, and often discount points already paid. Any deviation adds a pricing adjustment. The rate in the advertisement is real but describes a specific borrower who may not be you.
Should I wait for rates to drop before buying?
Timing rates is as unreliable as timing markets. Lower rates also tend to bring more buyers into the market, which raises prices and can offset the payment savings. A useful frame: you marry the house and date the rate — you can refinance a rate, but you cannot renegotiate a purchase price after closing.
Does shopping for a mortgage hurt my credit?
Minimally. Multiple mortgage inquiries within a 45-day window count as a single inquiry for scoring purposes, specifically so consumers can compare without penalty. A single hard inquiry typically costs fewer than five points and recovers within a year.