All About Mortgage Interest Rates

What is a mortgage interest rate?


The term “interest” describes both the cost of borrowing money, and the amount earned by lending money. A mortgage interest rate is the percentage of a home loan amount (principal) charged by a lender for the use of its money.

What are the different interest rate types?


Home mortgage interest may be either fixed or adjustable.

  • The interest on a fixed-rate loan will not change over time.
  • The interest rate on an adjustable rate mortgage (ARM) will be fixed initially, but after that initial term it may go up or down, depending on market conditions.

What is an annual percentage rate (APR)?


The Annual Percentage Rate (APR) is not the interest rate. It is the annual total cost of a home loan to a borrower. It starts with the mortgage interest rate, but also includes origination fees, loan discounts, transaction charges, and any premiums for credit-guarantee insurance. This creates a new, higher loan amount.

The APR is usually higher than the mortgage interest rate. Always ask for the APR. If you are comparing home loans, be sure you are comparing APRs to get a true picture of each loan’s cost.

How are mortgage interest rates set?


Home loan rates are set by the interaction of a complex set of market conditions. These include inflation, economic growth, the Federal Reserve’s monetary policy, the housing market, mortgage-backed securities (MBSs) and the 10 -Year Treasury Bond yield. There’s a common perception that the Federal Reserve sets mortgage rates, but the Fed’s policy is only one of the factors influencing rates.

What factors affect your interest rate?

Your individual interest rate is affected by considerations specific to you and your home loan.
These include:
  • Credit score

    Your credit score is a summary of the risk you present to a lender. A higher credit score is one factor in gaining a lower interest rate because it shows you are a lower risk and more likely to repay your loan.

  • Down payment amount

    A higher down payment means a lower loan amount, reducing the risk to the lender.

  • Loan term

    The loan term refers to the length of time you have to repay the loan. Common fixed-rate loan terms are 10-year, 15-year, 20-year and 30-year. Your initial loan amount may be the same, but the shorter the term, the lower the rate and the less you’ll pay in interest over the life of the loan.

How can you lower your mortgage interest rate?


There are several things you can control that will have a positive impact on your rate:
Improve your credit score.
  • Pay your bills on time.
  • Pay down large balances.
  • Don’t close old paid-off accounts – this reduces your available credit.
  • Don’t open any new credit accounts.
Make a larger down payment. 
Improve your debt-to-income ratio.
  • Pay down outstanding debt, including student loans, car loans, and credit card balances.
  • Raise your income with a second job.
Explore your loan options.
  • There are many different types of loans. Work with a knowledgeable loan originator to identify your loan choices.

Interest Rate Trivia: Lowest and Highest

Home interest rates have varied widely since Freddie Mac began tracking them in 1971. The first time the monthly average rate for a 30-year fixed-rate mortgage dropped below 3% was in August 2020 (2.94%). The highest monthly average rate ever recorded was 18.45% in October 1981.