Few numbers in real estate carry as much weight as your mortgage interest rate. This single percentage determines not just your monthly payment, but how much house you can afford and your total cost of ownership over time. Consider this: on a $300,000 loan, the difference between a 6% and 7% rate is about $200 per month—that's $72,000 over a 30-year term. A rate that seems "close enough" can cost you tens of thousands of dollars.
Understanding how rates work, what factors you can control, and how to shop effectively puts you in position to secure the best possible terms. Even in a high-rate environment, informed borrowers consistently get better deals than those who simply accept the first offer.
How Mortgage Interest Rates Work
When you borrow money to buy a home, you agree to pay back the principal (the amount you borrowed) plus interest (the cost of borrowing). Your interest rate, expressed as an annual percentage, determines how much that borrowing costs. On a $300,000 loan at 7%, you'll pay roughly $21,000 in interest during just the first year. Over the full 30-year term, you'll pay nearly $420,000 in interest alone—more than the original loan amount.
This is why even small rate differences matter so much. Use our mortgage calculator to see exactly how different rates affect your payment and total interest.
Fixed-Rate vs. Adjustable-Rate Mortgages
Fixed-rate mortgages lock in your interest rate for the entire loan term—15, 20, or 30 years. Your principal and interest payment never changes, which makes long-term budgeting straightforward. If rates drop significantly after you close, you'd need to refinance to take advantage, but if rates rise, you're protected.
Adjustable-rate mortgages (ARMs) offer a lower initial rate that's fixed for a set period—typically 5, 7, or 10 years—then adjusts periodically based on market conditions. A 5/1 ARM, for example, has a fixed rate for five years, then adjusts every year thereafter. ARMs come with caps that limit how much the rate can increase at each adjustment and over the life of the loan, but your payment can still rise substantially.
ARMs can make sense if you're confident you'll sell or refinance before the adjustment period, or if you need a lower initial payment. But they carry risk: if rates rise and you can't refinance or sell, you could face significantly higher payments.
What Determines Your Rate
Mortgage rates aren't arbitrary—they're influenced by both broad economic forces and your personal financial profile. Understanding both helps you know when to act and how to improve your position.
Economic factors set the baseline. Mortgage rates move closely with the 10-year Treasury yield, so when you hear about Treasury rates in the news, mortgage rates typically follow. The Federal Reserve's policies on interest rates and bond purchases ripple through the entire lending market. Inflation expectations matter too: when inflation rises, rates tend to follow because lenders need higher returns to maintain purchasing power on the money they lend.
These factors are outside your control, but they're worth watching if you're timing a purchase or deciding when to lock your rate.
The factors you can control often matter more for the rate you personally receive:
Your credit score has the biggest impact. Lenders use it to predict how likely you are to repay, and they charge accordingly. Borrowers with scores above 740 typically qualify for the best rates—those in the 700-739 range pay slightly more, 680-699 noticeably more, and below 680 can add half a percentage point or more to your rate. Check where you stand before you start shopping.
Your down payment affects both your rate and whether you'll pay private mortgage insurance. Lenders view larger down payments as lower risk—you have more to lose if you default, and they're lending against more equity. Putting 20% or more down typically gets you better rates and eliminates PMI entirely.
The loan type you choose matters too. Conventional loans often have the best rates for well-qualified borrowers. FHA loans may have competitive rates but add mortgage insurance that affects total cost. VA loans often offer excellent rates with no down payment required for eligible veterans.
Loan term creates a clear trade-off. A 15-year mortgage carries a lower interest rate than a 30-year—often 0.5% to 0.75% lower—because the lender gets repaid faster and takes less risk. The monthly payment is higher, but total interest paid is dramatically less.
Understanding Interest Rate vs. APR
When comparing loan offers, you'll see two percentages: the interest rate and the APR (Annual Percentage Rate). They measure different things, and understanding both helps you compare offers accurately.
The interest rate is the base cost of borrowing—the percentage charged on your loan balance each year. It's what directly determines your monthly principal and interest payment.
The APR is a broader measure that includes the interest rate plus certain fees and costs rolled into a single annualized figure. It accounts for origination fees, discount points, and certain other charges. The APR is always higher than the interest rate (unless the loan has no fees, which is rare).
Use the APR to compare total loan costs when you're looking at different lenders or loan options. Two loans might have the same interest rate but very different APRs if one charges significantly higher fees. However, if you plan to sell or refinance within a few years, the interest rate and monthly payment may matter more than total costs captured in the APR.
Strategies to Get the Best Rate
Improve your credit before applying. Since credit score is the biggest factor you control, addressing it first has the highest payoff. Pull your reports from all three bureaus at AnnualCreditReport.com and dispute any errors. Pay down credit card balances—your credit utilization (balance divided by credit limit) should be below 30%, ideally below 10%. Don't open new accounts or close old ones in the months before applying.
Shop multiple lenders aggressively. This is the single most underused strategy for getting better rates. Rates can vary by half a percentage point or more between lenders on the same day for the same borrower. Get quotes from at least three to five lenders—include a mix of banks, credit unions, mortgage brokers, and online lenders. Credit scoring models recognize mortgage shopping and treat all inquiries within a 14-45 day window as a single inquiry, so there's no credit penalty for shopping around.
Consider buying discount points. Mortgage points let you pay money upfront to lower your interest rate. One point costs 1% of your loan amount and typically reduces your rate by about 0.25%. On a $300,000 loan, one point costs $3,000 and might save you roughly $50/month. That's a 60-month breakeven—so points make sense if you'll keep the loan at least five years. Many lenders also offer "negative points" where they give you a credit toward closing costs in exchange for a slightly higher rate.
Increase your down payment if possible. Beyond avoiding PMI at 20%, a larger down payment signals lower risk to lenders. Some lenders offer slightly better rates at 25% down versus 20%, and the difference can be more significant at lower down payment levels.
Locking In Your Rate
Once you've found a competitive rate, you'll want to lock it—a commitment from the lender to honor that rate for a specific period while your loan is processed. Without a lock, you're "floating" and your rate could change before closing.
Most locks last 30 to 60 days, which aligns with typical closing timelines. Longer lock periods (75 or 90 days) often cost more because the lender takes on more interest rate risk. If your closing is delayed beyond your lock period, you may need to pay for an extension—or worse, your lock could expire and you'd need to accept current market rates.
Some lenders offer float-down provisions that let you capture a lower rate if the market improves after you lock. These provisions have specific rules and aren't always free, so understand the terms before assuming you're protected against rate drops.
When should you lock? Most experts recommend locking once you have an accepted offer and are confident in your closing timeline. Trying to time the market by floating rarely works out—rates can move quickly in either direction, and the stress often isn't worth the potential savings.
Ask each lender for a Loan Estimate—they're required to provide one within three business days of receiving your application. These standardized forms make it much easier to compare rates, fees, and total costs across different lenders.
Calculate Your Payment Get Pre-Approved
Frequently Asked Questions
A "good" rate depends on current market conditions and your financial profile. Compare your offered rate to the national average for your loan type and credit score range. Generally, getting within 0.25% of advertised rates for your credit tier is considered good.
Choose fixed if you plan to stay long-term and want payment stability. Consider an ARM if you'll sell or refinance within the fixed period, or if you need a lower initial payment. ARMs carry more risk if rates rise.
Lock when you're comfortable with the rate and have an accepted offer. Most experts recommend locking once you're under contract, as rates can move significantly during the 30-45 day closing period.