How Are Mortgage Rates Determined?

When you’re shopping for a home loan, the first question that always comes up is: what’s my rate? That single number dictates not only your monthly payment and how much you’ll pay over the life of your loan but also how big of a loan you can be preapproved for. But here’s the catch: mortgage rates aren’t pulled from a hat. They’re the product of global markets, Federal Reserve policy, lender pricing strategies, the lender you choose to work with and your own financial profile.

Understanding how mortgage rates are determined puts you in the driver’s seat. You won’t just be at the mercy of whatever number shows up on your quote—you’ll know what’s behind it, and how to improve it.

The Market Side of Mortgage Rates

Mortgage rates are influenced first by big-picture economics, not by a lender’s whim. Let’s break down the key market drivers:

The Federal Reserve and the Federal Funds Rate

The Fed doesn’t set mortgage rates directly, but it does set the federal funds rate—the overnight lending rate between banks. When the Fed raises this rate to combat inflation, borrowing becomes more expensive across the board. Mortgage lenders react by pricing loans higher. When the Fed cuts rates, the opposite happens.

Treasury Yields and Mortgage-Backed Securities

Mortgage rates track closely with the 10-Year Treasury yield, because both Treasuries and mortgage-backed securities (MBS) are traded in the bond market. Historically, the average 30-year fixed mortgage rate runs about two percentage points higher than the 10-Year Treasury. When investors flock to Treasuries (often during times of uncertainty), yields drop—and so do mortgage rates.

Inflation

Inflation isn’t so quiet—it’s been the focal point of every Fed meeting and making market headlines for years. When prices rise too quickly, lenders demand higher returns to offset the erosion of purchasing power. That pushes rates higher. When inflation cools, rates can ease. This is why markets obsess over every CPI release.

Jobs Data and Economic Growth

A strong labor market keeps consumer spending high, which can keep inflation sticky. Weak jobs reports, on the other hand, often push rates lower because they hint at economic slowdown. And when there’s a slowdown, the Fed is more likely to cut rates to stimulate growth.

The Personal Side of Mortgage Rates

Even though markets set the baseline, your personal financial profile determines the exact rate you’re offered.

Credit Score

Your credit score is the single biggest lever you control. The higher your score, the less risky you look to a lender—and the lower your rate. A borrower with a 760 score might qualify for a rate a half point lower than someone at 680. Over a 30-year loan, that difference can easily mean tens of thousands of dollars.

Down Payment or Equity

A larger down payment means you’re borrowing less relative to the home’s value. That lowers risk for the lender and often earns you a better rate. Conventional wisdom says 20% down gets you the best terms, but even moving from 3% down to 10% can make a noticeable impact.

Debt-to-Income Ratio (DTI)

Lenders measure how much of your income goes toward debt. A lower DTI signals stability and frees up more cash to cover your mortgage. If your DTI is high, expect to pay more. Conventional loans typically require a lower DTI—often capped around 45%—while FHA loans can stretch higher, sometimes into the 50% range. That flexibility makes FHA more forgiving for first-time buyers with student loans or other debts, but it usually comes with mortgage insurance costs that conventional borrowers can avoid once they build equity.

Loan Type and Property Type

Not all loans are priced the same. FHA and VA loans often come with lower rates than conventional loans because they carry government backing. Jumbo loans, by contrast, usually cost more. Similarly, primary residences are cheaper to finance than vacation homes or investment properties. Condos often carry slightly higher rates than single-family homes, since lenders factor in the added risk that comes with relying on the condo association to maintain the building and common areas.

Loan Term

Shorter terms mean lower rates. A 15-year fixed typically runs half a percent lower than a 30-year fixed. The tradeoff: a 15 year has significantly higher monthly payments because you're paying off the loan over 15 years instead of 30.

Mortgage Points

You can buy down your rate by paying mortgage points upfront—each point typically costs 1% of the loan amount. The math works best if you plan to keep the home for a long time. (Read more: Mortgage Points Explained). In today’s market, temporary buydowns can also make sense—especially if you expect rates to fall and plan to refinance later. Learn more: Temporary Mortgage Buydowns.

Why Rates Differ by Lender

Here’s something most homebuyers don’t realize: two people with identical credit scores and down payments can get very different quotes from different lenders on the same day. Why?

• Operating costs. Some lenders build in higher margins.

• Capacity. If a lender is swamped with applications, they may raise rates to slow volume.

• Loan programs. Not every lender specializes in non-QM, jumbo, or niche products.

This is exactly why working with a mortgage broker matters. Unlike banks or retail lenders, brokers aren’t tied to one set of rates—we can compare dozens of options in real time and find the lender that’s truly offering the best deal. At LendFriend, we shop multiple lenders on your behalf, so you’re not stuck with the first number someone gives you. (Read more: Mortgage Brokers vs. Banks: Who Really Gets You the Best Deal).

Real-World Example: Texas Buyers in 2025

In Texas, buyers are seeing how these factors play out in real time. Inventory in Austin, Houston, and San Antonio is up. Sellers are negotiating. But rates in the mid-6s still give buyers pause.

A couple in San Antonio recently came to us with strong credit and 15% down. Their first quote from a retail lender was 6.875%. We were able to offer them 6.375%. That half-point difference saved them $210 a month—over $75,000 across the life of the loan.

The lesson: the market sets the backdrop, but your choice of lender determines the outcome.

How to Put Yourself in the Best Position

You can’t control inflation or Treasury yields or mortgage rate spreads. But you can:

• Improve your credit score before applying

• Pay down high-interest debt to lower your DTI

• Consider a bigger down payment if possible

• Compare quotes across multiple lenders (this is where a broker earns their keep)

• Evaluate whether paying points makes sense for your situation

Can You Predict Where Rates Are Headed?

Not with certainty. But you can watch the signals:

• Federal Reserve meetings: Changes in language around inflation and jobs.

• CPI and PPI reports: Inflation data that moves markets.

• Jobs reports: Monthly employment numbers.

• Bond yields: Daily snapshots of investor sentiment.

This is why we created our Friday Rate Alerts—so our clients can stay ahead of the market without reading the Wall Street Journal every morning. You can also subscribe to our weekly newsletter for deeper insights and strategies: The Recap Newsletter.