What Is a Mortgage Interest Rate?

A mortgage interest rate is the annual cost of borrowing money to purchase a home, expressed as a percentage of the loan principal. For example, a 7% interest rate on a $300,000 mortgage means you are paying 7% per year on the outstanding balance — though because the balance declines each month as you make payments, the actual dollar cost of interest changes over time. The interest rate is distinct from the APR, which also includes lender fees and closing costs.

How Mortgage Rates Are Determined

Mortgage rates are shaped by a combination of macroeconomic forces and individual borrower factors:

• The 10-year Treasury yield is the closest market benchmark to the 30-year fixed mortgage rate. When Treasury yields rise, mortgage rates tend to follow. Investors who buy mortgage-backed securities (MBS) demand a spread above risk-free Treasuries to compensate for prepayment and default risk.
• The Federal Reserve's monetary policy influences rates indirectly. The Fed sets the federal funds rate (the overnight rate banks charge each other), which shapes short-term borrowing costs and broader economic expectations. When the Fed raises rates to fight inflation, mortgage rates often rise too — though the relationship is not mechanical.
• The secondary mortgage market plays a central role. Most mortgages are sold by lenders to Fannie Mae, Freddie Mac, or investors via MBS. Demand in this market affects how competitively lenders can price loans.
• Inflation expectations matter because lenders need returns that outpace inflation. Periods of high or rising inflation almost always coincide with higher mortgage rates.

Fixed-Rate vs. Adjustable-Rate Mortgages

Borrowers choose between two fundamental rate structures:

A 5/1 ARM, for example, carries a fixed rate for the first 5 years, then adjusts annually based on a benchmark index (such as SOFR) plus a margin set by the lender. ARMs include rate caps that limit how much the rate can move at each adjustment and over the life of the loan.

Factors That Affect Your Personal Rate

Two borrowers shopping on the same day will often receive different rate quotes. Lenders price individual risk based on:

• Credit score: The single biggest personal factor. A score of 760+ typically earns the best available rate. Each tier downward (740, 720, 700, etc.) adds incremental cost — sometimes 0.25–0.5 percentage points or more for scores below 680.
• Loan-to-value ratio (LTV): The higher your down payment, the lower your LTV and the less risk to the lender. Borrowers at 80% LTV (20% down) almost always receive better rates than those at 95% LTV.
• Loan type and term: 15-year fixed rates are typically 0.5–0.75% lower than 30-year fixed rates. FHA and conventional loans price differently. Jumbo loans often carry higher rates than conforming loans.
• Points paid at closing: You can buy down your rate by paying discount points upfront. One point equals 1% of the loan amount and generally reduces the rate by about 0.25%.
• Debt-to-income ratio: High DTI signals stretched finances and may push your rate upward or disqualify you altogether.
• Property type and use: Investment properties and second homes carry higher rates than primary residences. Condos sometimes cost more than single-family homes.

How Even Small Rate Differences Matter

A fraction of a percentage point in your mortgage rate has an outsized impact over a 30-year term. The table below shows total interest paid on a $300,000 loan over 30 years at three different rates:

The difference between 6.5% and 7.5% is $202 per month and more than $72,000 in total interest over the life of the loan. This is why shopping multiple lenders — even for a fraction of a point — is worth the effort.

Rate vs. APR: What's the Difference?

The interest rate reflects only the cost of borrowing the principal. The Annual Percentage Rate (APR) is a broader measure that includes the interest rate plus lender fees, origination charges, broker fees, and other closing costs, expressed as a yearly rate.

Because APR factors in these costs, it is always equal to or higher than the interest rate. APR makes it easier to compare two loan offers apples-to-apples — a loan with a slightly lower rate but high fees may have a higher APR than a loan with a slightly higher rate and no fees. When comparing lenders, look at APR alongside the rate to understand your true cost.

How to Get the Best Mortgage Rate

• Shop at least three lenders. Studies consistently show that borrowers who compare multiple offers save thousands in interest. Get loan estimates on the same day so you're comparing equal market conditions.
• Improve your credit score before applying. Pay down revolving debt, correct errors on your credit report, and avoid opening new accounts in the months before you apply.
• Make a larger down payment. Getting below 80% LTV eliminates PMI and often earns a better rate.
• Consider buying points. If you plan to stay in the home long-term, use our mortgage points calculator to determine whether the upfront cost is worth the long-term savings.
• Compare loan terms. A 15-year fixed loan carries a lower rate and dramatically less total interest, though the monthly payment is higher.
• Lock your rate once you have an accepted offer. Rate locks typically run 30–60 days and protect you from rate increases during the closing process.

Use our mortgage calculator to see how different rate scenarios change your monthly payment and total cost.

Source: Freddie Mac — Primary Mortgage Market Survey (PMMS)

This definition is for informational purposes only and does not constitute financial advice.