Mortgage rates are one of the most closely watched parts of the homebuying process, but they are also one of the most misunderstood. Headlines may say mortgage rates moved higher or lower, an online advertisement may show an attractive rate, and a friend may tell you what rate they recently received. None of those necessarily tells you what rate will be available for your particular loan.
Mortgage rates can change from day to day and sometimes during the same day. They also vary based on the borrower, property, loan program and structure of the transaction. Understanding what actually influences mortgage rates can make it much easier to evaluate your options.
Mortgage Rates Are Influenced by the Bond Market
Mortgage rates are closely connected to the market for mortgage-backed securities, commonly called MBS. As investors buy and sell these securities, their prices and yields change. Those movements can influence the rates mortgage lenders are able to offer.
The 10-year U.S. Treasury yield is often discussed alongside mortgage rates because the two frequently respond to similar economic forces. However, mortgage rates do not simply equal the 10-year Treasury yield, and the two do not always move by the same amount or even in the same direction.
Inflation expectations, employment data, economic growth, financial market conditions and investor demand can all affect the bond market and ultimately influence mortgage pricing.
Does the Federal Reserve Set Mortgage Rates?
No. The Federal Reserve does not directly set 30-year fixed mortgage rates.
The Federal Reserve controls certain short-term interest rates, most notably its target range for the federal funds rate. Changes in monetary policy can influence financial markets and borrowing costs throughout the economy, but there is no rule that says mortgage rates must rise when the Fed raises rates or fall when the Fed cuts them.
Financial markets also tend to anticipate Federal Reserve decisions. As a result, mortgage rates may move before an announced change in monetary policy and can sometimes move in a direction that seems inconsistent with the Fed’s latest decision.
Why Advertised Mortgage Rates Can Be Misleading
When comparing mortgage rates online, it is important to look beyond the advertised number. An advertised rate may be based on assumptions that do not match your transaction.
For example, the advertised rate may assume a particular credit score, down payment, loan amount, property type, occupancy type or number of discount points paid at closing. Some advertisements may also highlight the lowest available rate rather than the option that provides the best overall combination of rate and closing costs.
A lower interest rate is not automatically a better financial deal if obtaining that rate requires substantially higher upfront costs.
Your Mortgage Rate Depends on Your Specific Loan
Two borrowers purchasing similarly priced homes on the same day can receive different mortgage pricing. Factors that may affect the rate and cost of a loan include:
- Credit score and credit profile
- Loan program
- Down payment and loan-to-value ratio
- Loan amount
- Property type
- Primary residence, second home or investment property occupancy
- Loan term
- Rate-lock period
- Discount points or lender credits
This is why comparing only the interest rate between lenders can produce a misleading result. The loan structure and costs associated with that rate need to be compared as well.
Rate and APR Are Not the Same Thing
The interest rate determines the amount of interest charged on the mortgage balance. The annual percentage rate, or APR, is a separate calculation designed to reflect the interest rate along with certain finance charges associated with the loan.
APR can be useful when comparing similar loan options, but it should not be viewed in isolation. The actual cash required at closing, monthly payment, length of time you expect to keep the loan and whether you are paying points should also be considered.
Should You Pay Points for a Lower Mortgage Rate?
Discount points allow a borrower to pay additional money at closing in exchange for a lower interest rate. Whether paying points makes financial sense depends partly on how much the rate is reduced, the cost of the points and how long you expect to keep the mortgage.
For example, paying several thousand dollars upfront to reduce the monthly payment by a relatively small amount may take years to recover through monthly savings. For another borrower who expects to keep the mortgage for a long time, paying points could make more sense.
Rather than automatically choosing the lowest available rate, compare the cost and payment of several pricing options.
When Is Your Mortgage Rate Actually Locked?
A quoted mortgage rate and a locked mortgage rate are not necessarily the same thing. Until a rate is locked with the lender, market changes may affect the pricing available to you.
Rate locks are generally available for specific periods of time, and the appropriate lock period can depend on your expected closing date and the status of your transaction. Your lender should explain whether a quoted rate is locked, how long the lock lasts and whether any points or lender credits are associated with it.
How to Compare Mortgage Rates Correctly
When comparing mortgage offers, try to make the comparison as close to apples-to-apples as possible. Ask each lender to price the same loan program, loan amount, down payment, lock period and point structure at approximately the same time.
A small difference in rate does not necessarily mean one lender is offering a better loan. Closing costs, lender credits, mortgage insurance and other features of the financing can materially affect the overall comparison.
Have Questions About Current Mortgage Rates?
If you are buying or refinancing a home in Maryland, Washington DC or Virginia, I can help you compare mortgage options and understand the relationship between the interest rate, points, closing costs and monthly payment.
Have questions about mortgage rates or want to compare financing options? Contact me and I’ll be happy to review the numbers with you.
Ready to explore your options? Start your prequalification online.
Mortgage rates and loan pricing are subject to change without notice and depend on borrower, property and loan characteristics. This information is for general educational purposes and is not a commitment to lend.
