How mortgage rates work

#What moves mortgage rates

Many US mortgages are pooled into mortgage-backed securities and sold to investors, so mortgage rates follow what those investors demand. In practice, 30-year fixed rates tend to move with long-term Treasury yields, especially the 10-year, plus a spread for the extra risks of mortgages — chiefly that borrowers can repay early when rates fall.

• Inflation. Investors want a return above expected inflation. Consumer prices rose 3.7% over the latest 12 months, according to the Bureau of Labor Statistics.
• The Federal Reserve. The Fed sets a short-term policy rate, which directly moves the bank prime rate (now 7%) and with it many home equity lines. Its effect on 30-year mortgage rates is indirect, through expectations for inflation and future policy.
• The economy and markets. Strong growth and heavy government borrowing tend to push long-term yields up; weaker data and demand for safe assets tend to pull them down.
• Lender capacity and competition. When lenders are busy they can price less aggressively, and the spread over Treasuries can widen.

Nobody can reliably forecast where rates go next. Plan with the rate you can lock today, and treat a later refinance as a possibility, not a plan.

#The benchmark: Freddie Mac’s weekly survey

The Primary Mortgage Market Survey is the rate you see quoted in the news. Freddie Mac builds it from thousands of loan applications submitted through its Loan Product Advisor system and publishes it on Thursdays at 12 p.m. ET, averaging the previous Thursday through Wednesday.

It describes a narrow borrower: a conventional, conforming home purchase loan on an owner-occupied single-family home, with 20% down and good to excellent credit. It doesn’t report fees or points, because lenders don’t always submit them.

This week’s 30-year average of 7.24% is down 0.08 percentage point from 7.32% the week before — a change of about $5.43 a month per $100,000 borrowed. The 15-year average is 6.6%, which with the shorter term means a much higher payment of $876.61 per $100,000 but far less interest; see 15-year vs 30-year mortgages.

#What each rate costs per $100,000

#Interest rate vs APR

The interest rate sets your monthly principal and interest. The annual percentage rate (APR) expresses the yearly cost of the credit including most lender charges — points, origination fees and mortgage insurance — so it is usually higher than the rate. A loan with a low rate and heavy fees can carry a higher APR than a loan with a slightly higher rate and no points.

APR is most useful for comparing the same loan type and term between lenders, on the same day. It assumes you keep the loan for the full term, so it overstates the effect of upfront fees if you will sell or refinance in a few years. It also matters at closing: if the APR on your Closing Disclosure rises by more than 0.125% on a regular loan, you get a fresh 3 business days before you can close — see Loan Estimate and Closing Disclosure.

#Why your quote differs from the average

• Credit score. Fannie Mae and Freddie Mac charge loan-level price adjustments by score and down payment, and lenders pass them on — see credit score for a mortgage.
• Down payment. Less than 20% down usually raises the rate or adds PMI, or both.
• Loan type and size. FHA, VA and USDA loans are priced differently, and jumbo loans above the conforming limit ($832,750 in most counties) follow their own market.
• Term and rate type. Shorter terms and adjustable-rate loans usually start lower than a 30-year fixed — see fixed vs adjustable-rate.
• Points and credits. Paying discount points buys the rate down; taking lender credits pushes it up.
• Property and occupancy. Second homes, investment properties, condos and two- to four-unit homes often cost more.
• Lock period and timing. Longer locks usually cost more, and lenders reprice during the day as markets move.

#Rate locks

A rate lock means your interest rate won’t change between the offer and closing, as long as you close within the lock period. The CFPB says locks are typically available for 30, 45 or 60 days, sometimes longer, and extensions can be expensive — your Loan Estimate shows whether the rate is locked and when the lock ends, but not what an extension costs, so ask.

A lock isn’t absolute. Your rate can still change if your application changes: a different loan amount or down payment, a change in your credit score, income the lender can’t document, or an appraisal that comes in higher or lower than expected. Many buyers lock once they have a signed purchase contract and a closing date. Our article on how a rate lock works goes into more detail.

The buying a home hub shows where rate shopping fits in the purchase, and the FHA loans guide explains how FHA pricing differs.