Mortgage rates depend on two categories of factors: macroeconomic conditions you cannot control and personal financial details you can. The Federal Reserve’s monetary policy, inflation levels, and bond market movements set the baseline rate environment. Your credit score, down payment, loan type, and property use determine where you land within that environment. A mortgage loan priced at 6.5% for one borrower might cost 7.5% for another applying the same day—the difference comes down to individual risk profile.
Does the Federal Reserve Set Mortgage Rates?
No. The Fed sets the federal funds rate, which influences mortgage rates indirectly.
When the Fed raises the federal funds rate, borrowing costs increase across the economy. Mortgage rates typically follow within days or weeks. When the Fed cuts rates, mortgage rates generally decline.
The mechanism works through the bond market. Most mortgages get packaged into mortgage-backed securities (MBS) that compete with Treasury bonds for investors. Treasury yields and MBS yields move together—when one rises, the other must rise to remain competitive. Higher MBS yields translate directly to higher mortgage rates.
Fed meeting announcements, policy statements, and economic projections all trigger rate movement. Markets often price in expected changes before official announcements.
How Does Inflation Affect Mortgage Rates?
Higher inflation pushes mortgage rates up. Lower inflation allows rates to fall.
Lenders commit capital for 15–30 years when issuing mortgages. If inflation runs at 4% annually, a lender earning 6% interest loses purchasing power—the real return drops to approximately 2%. Lenders compensate by demanding higher rates when inflation rises or when inflation expectations increase.
Key inflation reports that move rates include the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE). A CPI reading above expectations typically pushes rates higher within hours.
Why Do Employment Reports Change Rates?
Strong employment data signals economic growth, which often brings inflation pressure. The Fed responds to overheating economies by raising rates, so strong jobs numbers push mortgage rates higher.
Weak employment data works in reverse. Rising unemployment suggests economic slowdown, giving the Fed room to cut rates. Mortgage rates often ease following disappointing jobs reports.
The Bureau of Labor Statistics releases employment data monthly. A report showing 300,000 new jobs when economists expected 150,000 can move rates noticeably the same day.
How Much Does Credit Score Affect Mortgage Rates?
Credit score impact is substantial—often 1% or more between high and low scores.
Typical rate adjustments based on FICO score:
- 760 and above: Best available rate (baseline)
- 700 to 759: Add 0.25% to 0.5%
- 680 to 699: Add 0.5% to 0.75%
- 660 to 679: Add 0.75% to 1.0%
- 640 to 659: Add 1.0% to 1.5%
- Below 640: Add 1.5% or more, possible denial
If your credit score is 680, you’ll pay roughly 0.5% to 0.75% more than a borrower with 760. On a $400,000 loan, that difference costs approximately $150 to $200 monthly—$54,000 to $72,000 over 30 years.
Credit scores can be improved before applying. Dispute errors on credit reports, reduce revolving balances below 30% utilization, and avoid opening new accounts within 6 months of your application.
Does Down Payment Size Change Your Rate?
Yes. Larger down payments result in lower rates.
Loan-to-value ratio (LTV) measures how much you borrow relative to the property value. A 20% down payment creates 80% LTV. A 5% down payment creates 95% LTV.
If you put down 20% or more, you avoid private mortgage insurance and typically receive the best rate pricing. If you put down less than 20%, expect both PMI costs and a rate premium—combined impact of 0.5% to 1.0% on effective borrowing cost.
Some lenders offer additional rate improvements at 25% down and 40% down. Refinancing follows the same pattern: homeowners with 30%+ equity qualify for better rates than those at 90% LTV.
Do Different Loan Types Have Different Rates?
Yes. VA loans typically offer the lowest rates, followed by conventional loans for strong borrowers, then FHA loans.
VA loans carry government guarantees that reduce lender risk significantly, enabling lower rates despite zero down payment. Conventional loans reward high credit scores with competitive rates but penalize weaker profiles more heavily. FHA loans offer more accessible qualification but typically price 0.125% to 0.25% higher than conventional for equivalent borrowers.
Jumbo loans—those exceeding $766,550 in most areas—historically carried premiums of 0.25% to 0.5% above conforming loans. Current market conditions have compressed this spread; some jumbo products now match or beat conforming rates.
Adjustable-rate mortgages (ARMs) start 0.5% to 1.25% lower than comparable fixed-rate loans in exchange for future rate uncertainty.
Does Loan Term Length Affect the Rate?
Shorter terms get lower rates. A 15-year mortgage typically runs 0.5% to 0.75% below a 30-year mortgage.
If a 30-year fixed rate is 6.75%, the 15-year rate from the same lender might be 6.0% to 6.25%. Lenders face less uncertainty over shorter periods and price that reduced risk into lower rates.
The trade-off: 15-year loans require significantly higher monthly payments but dramatically reduce total interest paid.
Does Property Type Affect Mortgage Rates?
Yes. Primary residences receive the best rates. Investment properties pay the highest.
Rate adjustments by occupancy type:
- Primary residence: Best rate (baseline)
- Second home or vacation property: Add 0.25% to 0.5%
- Investment or rental property: Add 0.5% to 0.75%
Lenders price this way because borrowers default on investment properties before their primary residence when finances tighten.
Property structure also matters. Single-family homes get better rates than condos. Condos get better rates than multi-unit properties. Manufactured homes and unique properties face additional premiums.
When Should You Lock Your Mortgage Rate?
Lock when you find an acceptable rate and have a clear closing timeline.
Rate locks guarantee your quoted rate for a specific period, typically 30 to 45 days at no cost. Longer locks of 60 to 90 days may carry fees or slightly higher rates.
If rates drop after you lock, some lenders offer float-down provisions allowing you to capture the lower rate—usually for a fee of 0.25% to 0.5%.
Timing rate locks around Fed meetings or economic reports is unreliable. These events are already partially priced into current rates. Focus instead on factors within your control: credit optimization, down payment size, and comparing offers from multiple lenders.
What Can You Actually Control?
Economic forces determine the rate environment. Your credit, equity, and loan structure determine your position within it.
A borrower with a 780 credit score, 25% down payment, and primary residence purchase captures rates at the low end of the market. A borrower with a 650 score, 5% down, and investment property pays premiums across every category. The gap between these profiles often exceeds 1.5 percentage points—potentially $300+ monthly on a $400,000 loan.
Improve what you can before applying. Accept what you cannot change. Shop multiple lenders regardless—rate variation between lenders often exceeds 0.25% for identical borrower profiles.