Last reviewed May 23, 2015

Mortgage Rates Explained

How mortgage rates work plus today

Looking for today's current mortgage rates? You're not alone. Thousands of U.S. consumers shop for low rates each day.

To get access to the lowest mortgage interest rates, though, you'll want to know a little bit about how rates are "made". The more you know about how rates work, the better you can negotiate low rates from your preferred mortgage lender.

Mortgage rates today change quickly. Read on to learn more.

Get a personalized rate quote here.

How Mortgage Rates Are "Made"

Did you ever wonder where mortgage rates come from? Mortgage rates are born from bonds the mortgage-backed securities (MBS) market. Similar to corporate bonds, mortgage-backed bonds trade all day, every day. Pricing changes constantly.

In general, as the price of a mortgage-backed bond changes, so will today's rates. This applies to conventional mortgages backed by Fannie Mae and Freddie Mac bonds; and FHA loans, VA loans and USDA loans backed by Ginnie Mae mortgage bonds.

The price of a mortgage bond is based on supply and demand. When Wall Street's demand for mortgage bonds increases, all things equal, mortgage bond prices rise which causes mortgage rates to fall.

Mortgage rates move in the opposite direction from mortgage bond prices.

Demand for mortgage bonds can change for a multitude of reasons, the most common of which is risk-avoidance. Because most mortgage-backed bonds are guaranteed by the U.S. government, they're considered "extra safe" and unlikely to default.

During periods of economic or political uncertainty, then, mortgage bonds tend to be in high demand, which leads mortgage interest rates lower. This trading pattern is known as a "flight-to-quality" and it's a fairly common one. 

Note that interest rates for Fannie Mae- and Freddie Mac-backed loans are based on a different MBS class as compared to rates for FHA loans including the FHA Streamline Refinance; and VA loans and USDA loans.

Mortgage rates among the five types will often move in the same direction, but not always in equal measure.

Also, be aware that rates are subject to "adjustments"; price changes made by the agency securing the bond. The generic name for such adjustments is "loan-level pricing adjustments". Loan-level pricing adjustment are akin to "middleman" fees and they reflect the risk of a insuring a particular loan trait.

For example, mortgage interest rates on a 2-unit property may be higher via Fannie Mae because multi-unit homes are more likely to default than 1-unit homes. The pricing is subject to additional increases for borrowers with low credit scores.

USDA mortgage rates are often the lowest of the government-backed loan types. Conventional mortgage rates via Fannie Mae and Freddie Mac are often the highest.

Click to compare today's live rates

Things That Don't Control Mortgage Rates

Mortgage rates are controlled by the price of mortgage-backed bonds. When mortgage bond prices rise, mortgage rates sink. Conversely, when mortgage bond prices drop, mortgage rates rise.

Aside from loan-level pricing adjustments, there are no other direct forces on U.S. rates. This distinction is important, too. When you understand the forces controlling the current mortgage rates, you can be a better shopper.

For example, it's commonly said that today's rates follow the path of the 10-Year Treasury Note, which is another government-backed issuance. This is not true.

Over the course of years, mortgage rates and the 10-Year Treasury Note will track together. On any given day, however, they will not. There are plenty of days on which mortgage bonds and Treasury Notes diverge.

The Fed Funds Rate is also unlinked to mortgage rates.

The Fed Funds Rate is the overnight interest rate at which banks borrow money from each other. It's an interest rate fixed by the Federal Reserve and used to speed up or slow down the broader U.S. economy.

The Fed Funds Rate and the 30-year mortgage rate have differed by as much as five percentage points over the last 10 years; and by as little as one-half of one percentage point over the same period of time.

If the Fed Funds Rate controlled current interest rates for home loans, the difference in the products' interest rates would be constant.

And, lastly, mortgage rates are not governed by the Federal Reserve, any of its members, or any elected U.S. official. The rhetoric and actions of our nation's central bank can affect demand for mortgage-backed bonds, but none can "set" home loan interest rates at-will.

Mortgage rates move at random. 

Shopping For Mortgage Rates

Mortgage rates move randomly and change with little or no advance warning. Therefore, when you're shopping for a mortgage, it's important to know the tricks and to have a plan.

The surest path to great, low rates is to do your mortgage shopping the "right way", which requires a little bit of prep work  plus a willingness to walk away if rates aren't what you want.

The trick is to recognize how lenders will never quote a mortgage rate by itself. It's always today's rates plus the associated closing costs. Until you separate this pair into its component parts, it's impossible do a proper loan comparison.

There are two ways, then, to shop for mortgage interest rates.

  1. You can shop for a particular mortgage rate that you want
  2. You can shop for a particular closing cost that you want

When you isolate and shop for a single loan variable, it becomes easy to know which mortgage lender is giving you the best "deal".

As an illustration, let's say you want a rate of 4.00%. That's your "fixed" variable. Now, all you have to do is shop for the lowest closing costs at that 4.00% rate. Whichever lender offers the lowest costs is the lender with the best overall price.

Or, let's say you prefer a zero-closing cost mortgage. In this instance, closing costs are your fixed variable -- at $0. To find your best overall mortgage, ask each lender what interest rate they can quote assuming no closing costs whatsoever.

The lender with the lowest offered rate is the lender with the best overall package.

Click to compare today's live mortgage rates.

How To Time Your Mortgage Rate Lock

After you've selected a mortgage lender, you'll want to have the lender execute a rate lock commitment on your behalf.

A "rate lock" is a commitment from the bank to honor a specific mortgage rate for a specific number of days. It's a contract which states that no matter what happens in the mortgage bond market while the rate lock commitment is in effect, the lender agrees to close your loan at the agreed-upon mortgage interest rate.

Rate locks are risky to a bank because anything can happen prior to your loan's closing. And, the longer for which your rate lock commitment lasts, the more risk the bank assumes.

This is why lenders make rate lock commitments available in 15-day increments with mortgage rates rising 0.125 percentage points for each additional 15 days required.

A 45-day rate lock will increase your rate by one-eighth percent. A 60-day rate lock will increase your rate a quarter-percent.

Mortgage applicants who can close on a loan in 30 days or fewer, therefore, get access to lower mortgage rates than applicants who require two months or more. This becomes especially relevant for purchase transactions when closing data are sometimes set forty-six days in the future.

Moving the closing date one day sooner gives a borrower access to 45-day mortgage rates instead of 60-day, which results in a lower interest rate.

Compare Today's Current Mortgage Rate Quotes

Mortgage rates change all day, every day and it can be difficult to know when rates are their lowest. However, with a little bit of knowledge of how rates work and why rates changes, shoppers can improve their chances of locking the best possible loan.

Compare today's live rates and see for what you're eligible. Mortgage rates are available online at no cost, with no social security number required to get started, and with no obligation to proceed whatsoever.

Click to get a live mortgage rate quote now

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

Posts Covering Mortgage Rates

Mortgage Rates Today – Today’s Analysis on Rates

Mortgage Rates Drop For First Time In 4 Weeks, Says Freddie Mac

Being Smart About This Week’s Mortgage Rates (Conv, FHA, VA, USDA)

Want The Lowest Mortgage Rates: Look VA/USDA First, Then FHA, Then Conventional

Mortgage Rate Predictions For May 2015 (FHA, VA, USDA & Conv)

Today’s Mortgage Rates Are The Lowest Since 3 Months Ago

Mortgage Rates Explained

How Today’s Mortgage Rates Might Soon Hit 2%

These Days, It Seems Like Everyone’s Looking For A Mortgage Refinance

Today’s Mortgage Rates Could Move Violently, Subject To “Technical” Trades

Predicting Mortgage Rates: The Mortgage Rate Game Announces Winners For Q1 2015

Getting Smart With This Week’s Mortgage Rates (Conv, FHA, VA, USDA)

Today’s Mortgage Rates Lowest In 10 Weeks; 30-Year Drops To 3.66%

Today’s Mortgage Rates Forecast (Conventional, FHA, VA, USDA)

Current Mortgage Rates May Be Headed For Chaos This Week

Mortgage Rate Predictions For April 2015 (FHA, VA, USDA & Conv)

Beware: Today’s Mortgage Rates Subject To “Long Weekend” Effect

Mortgage Rates Today Have Millions Of Homeowners “In The Money”

Lowest Mortgage Rates (In Order): VA Loans, Then FHA Loans, Then Conventional

Mortgage Rates Today Are The Lowest In 2 Months

Mortgage Rate Forecast: Strong U.S. Dollar Pushes Rates Down

Did You Catch How Quickly Mortgage Interest Rates Just Dropped?

Getting Smart With This Week’s Mortgage Rates

5 Types Of Homeowners Who Should Refinance *Right Now*

Mortgage Rates Still Under 4%, But Make Biggest 1-Week Jump Since 2013

Mortgage Rate Forecast: Can Interest Rates Sustain These Low Levels Much Longer?

30-Year Mortgage Rates Fall To 3.75%; First Drop In 4 Weeks

Mortgage Rate Predictions For March 2015 (FHA, VA, USDA & Conv)

Mortgage Rate Preview: Will 30-Year Rates Rise For Third Straight Week?

Today’s Mortgage Rates Worst For Buyers In Florida, Best For Buyers In California

30-Year Mortgage Rates Surge To 3.69%; Biggest 1-Week Jump In 5 Months

Mortgage Rate Forecast: Can 30-Year Rates Fall Below 3.59%?

30-Year Mortgage Rates Drop To 3.59%; Is It Finally Time To Refinance?

Looking For The Lowest Mortgage Rates? Don’t Miss The VA Loan Program.

Mortgage Rate Predictions For February 2015 (FHA, VA, USDA & Conv)

30-Year Mortgage Rate Rises To 3.66 Percent; First Increase Of 2015

Mortgage Rate Preview: Will 30-Year Rates Fall Because Of Greece, Fed?

Mortgage Rates Sink To 3.66%; Rates Best In California & Washington

Mortgage Rate Forecast: Can 30-Year Rates Drop Again This Week?

Current 30-Year Mortgage Rates Vs Rates For 5-Year ARMs