Understanding Mortgage Rates
Learn what drives mortgage rates and how to get the best rate possible.
Your mortgage interest rate is one of the most significant factors in determining your monthly payment and the total cost of your loan. Even a small difference in the rate can save you tens of thousands of dollars over the life of your mortgage. This guide explains how rates are determined and what you can do to secure a lower rate.
What is a Mortgage Rate?
A mortgage rate is the interest you pay to a lender for borrowing money to buy a home. It is expressed as a percentage of the total loan amount. The rate determines how much you will pay in interest each month and over the entire loan term.
Fixed-Rate vs. Adjustable-Rate Mortgages (ARM)
There are two main types of mortgage interest rates:
| Fixed-Rate Mortgage | Adjustable-Rate Mortgage (ARM) | |
|---|---|---|
| How it Works | The interest rate remains the same for the entire loan term. Your principal and interest payment will never change. | The interest rate is fixed for an initial period (e.g., 5, 7, or 10 years) and then adjusts periodically based on market conditions. |
| Best For | Buyers who want predictable, stable monthly payments and plan to stay in their home for a long time. | Buyers who plan to sell or refinance before the fixed period ends, or who are comfortable with the risk of a potentially higher payment in the future. |
Factors That Influence Your Mortgage Rate
Lenders consider a variety of factors when determining your interest rate. Some are within your control, while others are not.
How to Get a Lower Mortgage Rate
- Improve Your Credit Score: This is the most important factor within your control. A higher score signals lower risk to lenders.
- Make a Larger Down Payment: A down payment of 20% or more can help you get a better rate and avoid PMI.
- Choose a Shorter Loan Term: 15-year mortgages typically have lower interest rates than 30-year mortgages.
- Lower Your Debt-to-Income (DTI) Ratio: Paying down other debts can make you a more attractive borrower.
- Shop Around: Compare offers from at least three different lenders to find the best deal.
- Consider Paying Points: Discount points are fees you pay to the lender at closing in exchange for a lower interest rate.
What is an APR?
The Annual Percentage Rate (APR) is a broader measure of the cost of borrowing money than the interest rate alone. The APR includes the interest rate plus other costs, such as lender fees, discount points, and some closing costs. Because it includes these additional costs, the APR is usually higher than the interest rate.
When comparing loan offers, the APR is often a better indicator of the true cost of the loan.
Locking Your Mortgage Rate
A mortgage rate lock is a guarantee from a lender to hold a specific interest rate for you for a set period, typically 30-60 days. This protects you from a potential increase in interest rates between the time you apply for your loan and the time you close on your home.
- When to Lock: Most people lock their rate after they have a signed purchase agreement on a home.
- Float-Down Option: Some lenders offer a float-down option, which allows you to get a lower rate if market rates fall after you lock.
See How Different Rates Affect Your Payment
Use our free mortgage calculator to see how a lower interest rate can impact your monthly payment and total loan cost.
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