Your mortgage interest rate is one of the most important factors in determining your monthly payment and the total cost of your home. Even a small difference in rates can mean tens of thousands of dollars over the life of your loan. This comprehensive guide explains everything you need to know about mortgage rates and how to secure the best possible rate.

What Is a Mortgage Interest Rate?

A mortgage interest rate is the cost you pay to borrow money from a lender, expressed as a percentage of your loan amount. This rate determines how much interest you'll pay over the life of your loan in addition to repaying the principal amount you borrowed.

For example, on a $300,000 loan at 7% interest over 30 years, you'll pay approximately $418,000 in interest alone. At 6%, that interest drops to about $347,000—a savings of $71,000 just from a 1% rate difference.

Types of Mortgage Rates

Fixed-Rate Mortgages

A fixed-rate mortgage maintains the same interest rate for the entire loan term, whether that's 15, 20, or 30 years. Your principal and interest payment remains constant, making budgeting predictable and protecting you from rising interest rates.

Advantages:

Predictable monthly payments that never change
Protection from rising interest rates
Easier to budget and plan long-term
Peace of mind knowing your rate is locked in

Disadvantages:

Typically higher initial rates than adjustable-rate mortgages
No benefit if market rates decrease (unless you refinance)
May pay more interest in the early years compared to ARMs

Best for: Buyers who plan to stay in their home long-term, prefer payment stability, or believe rates will rise in the future.

Adjustable-Rate Mortgages (ARMs)

An ARM starts with a fixed rate for an initial period (typically 3, 5, 7, or 10 years), then adjusts periodically based on market conditions. These are often labeled as 5/1 ARM, 7/1 ARM, etc., where the first number is the fixed period and the second is how often it adjusts afterward.

Advantages:

Lower initial interest rates than fixed-rate mortgages
Lower initial monthly payments
Can save money if you sell or refinance before the rate adjusts
May benefit from falling interest rates

Disadvantages:

Payment uncertainty after the fixed period ends
Payments can increase significantly if rates rise
More complex to understand and predict
Risk of payment shock when rates adjust

Best for: Buyers who plan to sell or refinance before the rate adjusts, expect their income to increase, or believe interest rates will decrease.

Hybrid ARMs

These combine features of fixed and adjustable rates, offering a longer fixed period (5-10 years) before adjusting. They provide more stability than traditional ARMs while still offering lower initial rates than fixed-rate mortgages.

What Determines Your Mortgage Rate?

Mortgage rates are influenced by both broad economic factors and your personal financial situation:

Economic Factors

Federal Reserve Policy: The Fed's actions influence short-term interest rates, which affect mortgage rates
Inflation: Higher inflation typically leads to higher mortgage rates
Economic Growth: Strong economic growth often pushes rates higher
Bond Market: Mortgage rates closely follow 10-year Treasury yields
Housing Market Conditions: Supply and demand in the housing market affect rates

Personal Factors

Credit Score: Higher scores qualify for lower rates. A 760+ score typically gets the best rates, while scores below 620 face significantly higher rates or may not qualify at all
Down Payment: Larger down payments (20% or more) typically secure better rates because they represent less risk to lenders
Loan Amount: Very large loans (jumbos) and very small loans may have higher rates
Loan Type: Conventional, FHA, VA, and USDA loans have different rate structures
Loan Term: Shorter terms (15 years) typically have lower rates than longer terms (30 years)
Property Type: Single-family homes usually get better rates than condos, multi-family, or investment properties
Occupancy: Primary residences get better rates than second homes or investment properties
Debt-to-Income Ratio: Lower DTI ratios may qualify for better rates

APR vs. Interest Rate: What's the Difference?

Many borrowers confuse the interest rate with the Annual Percentage Rate (APR), but they're different and both important:

Interest Rate

The interest rate is the cost of borrowing the principal loan amount. It's used to calculate your monthly principal and interest payment.

APR (Annual Percentage Rate)

The APR includes the interest rate plus other costs like origination fees, discount points, and some closing costs, expressed as a yearly rate. It represents the true cost of the loan and is useful for comparing offers from different lenders.

Example: A loan might have a 6.5% interest rate but a 6.8% APR once fees are included. Always compare APRs when shopping for mortgages, not just interest rates.

How to Get the Best Mortgage Rate

Follow these proven strategies to secure the lowest possible rate:

1. Improve Your Credit Score

Your credit score has the biggest impact on your rate. Even a 20-point increase can lower your rate. To improve your score:

Pay all bills on time for at least 6-12 months before applying
Pay down credit card balances to below 30% of limits (ideally below 10%)
Don't close old credit cards (length of credit history matters)
Avoid applying for new credit in the months before your mortgage application
Check your credit reports for errors and dispute any inaccuracies

2. Save for a Larger Down Payment

Putting down 20% or more typically qualifies you for better rates and eliminates PMI. If you can't reach 20%, even increasing from 5% to 10% can improve your rate.

3. Shop Multiple Lenders

Rates can vary significantly between lenders. Get quotes from at least 3-5 lenders including banks, credit unions, and online lenders. Do this within a 14-45 day window so multiple inquiries count as one for credit scoring purposes.

4. Consider Buying Points

Mortgage points (also called discount points) allow you to pay upfront to lower your interest rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%. This makes sense if you plan to keep the loan long enough to recoup the upfront cost through lower monthly payments.

5. Choose the Right Loan Term

Shorter loan terms have lower interest rates. A 15-year mortgage might have a rate 0.5-0.75% lower than a 30-year mortgage. If you can afford the higher monthly payment, you'll save significantly on interest.

6. Time Your Application

Mortgage rates fluctuate daily based on economic news and market conditions. While timing the market perfectly is impossible, avoid applying during periods of economic uncertainty or when the Fed is raising rates.

7. Lock Your Rate

Once you find a good rate, lock it in. Rate locks typically last 30-60 days and protect you from rate increases while your loan is processed. Some lenders offer float-down options that let you take advantage of rate decreases during the lock period.

8. Reduce Your Debt-to-Income Ratio

Pay off or pay down debts before applying. A lower DTI ratio makes you a less risky borrower and may qualify you for better rates.

9. Consider Different Loan Types

FHA loans may offer competitive rates for borrowers with lower credit scores. VA loans often have the best rates for eligible veterans. Compare all options to find the best rate for your situation.

10. Avoid Common Mistakes

Don't make large purchases or take on new debt before closing
Don't change jobs if possible (lenders prefer employment stability)
Don't make large deposits without documentation (lenders need to verify all funds)
Don't skip the pre-approval process (it shows sellers you're serious)

When to Consider Refinancing

Refinancing can make sense when:

Rates have dropped at least 0.5-1% below your current rate
Your credit score has improved significantly since you got your original loan
You want to switch from an ARM to a fixed-rate mortgage
You want to shorten your loan term
You want to eliminate PMI by reaching 20% equity

However, remember that refinancing resets your amortization schedule and comes with closing costs (typically 2-5% of the loan amount), so calculate whether the savings justify the expense.

Calculate Your Mortgage Payment

Want to see how different interest rates affect your monthly payment? Our mortgage calculator lets you compare rates and see exactly how much you'll pay monthly and over the life of your loan. You can also use our comparison tool to evaluate different rate scenarios side-by-side.

Current Rate Environment

As of early 2025, mortgage rates remain elevated compared to the historic lows of 2020-2021 but have stabilized somewhat. The Federal Reserve's monetary policy continues to influence rates, and economic indicators like inflation and employment data cause weekly fluctuations.

For the most current rates, check with multiple lenders and consider working with a mortgage broker who can access rates from numerous lenders simultaneously.

Conclusion

Understanding mortgage rates and how to secure the best rate is crucial for minimizing the cost of homeownership. Whether you choose a fixed or adjustable rate depends on your financial situation, risk tolerance, and how long you plan to stay in the home. By improving your credit, saving for a larger down payment, and shopping multiple lenders, you can potentially save tens of thousands of dollars over the life of your loan.

Ready to see how different rates affect your mortgage payment? Use our free calculator to compare rates and find the best mortgage option for your situation.

Mortgage Rates Explained: Fixed vs Variable and How to Get the Best Rate