What determines your home loan rate
Your rate depends on factors you control and factors you don't. The ones you control are your credit score, down payment size, and loan type. The ones you don't are the current market, your lender's pricing, and economic conditions that shift daily.
Lenders use your credit score as the primary signal of risk. A score above 740 typically gets you the lowest rates available; below 620 and you may face higher rates or be turned down. Your down payment matters because putting down 20 percent or more means you're borrowing less and the lender takes less risk. Loan type — fixed-rate versus adjustable-rate, 15-year versus 30-year — also changes what rate you're offered.
The market rate itself moves with the broader economy and Federal Reserve decisions. When the Fed raises interest rates, mortgage rates usually rise within days. When it cuts rates, lenders may lower their offerings, but not always by the same amount. This is why two people shopping on the same day can see different rates: one lender may have priced aggressively to win business, another may be more cautious.
Key Takeaways
- Your credit score, down payment size, and debt-to-income ratio are the main factors lenders use to set your rate, and improving any of them before you shop can lower what you're offered.
- Rates change daily and vary between lenders, so getting quotes from at least three different sources — banks, credit unions, and mortgage brokers — takes a few hours and can save thousands over the life of the loan.
- A rate quote is only valid for a set number of days (usually 30 to 45), so you need to move quickly once you find a rate you want to lock in.
- The interest rate is not the only cost; closing costs, origination fees, and points all affect your true cost, and comparing the full loan estimate matters more than comparing rates alone.
- An adjustable-rate mortgage starts lower than a fixed rate but rises after the initial period, so it only makes sense if you plan to sell or refinance before the rate adjusts.
How to shop for rates across lenders
Start by getting quotes from at least three sources: a traditional bank, a credit union (if you belong to one), and a mortgage broker. Each will pull your credit and run your numbers, which creates a hard inquiry on your report. Multiple inquiries within 14 days count as one inquiry for credit scoring purposes, so do your shopping in a short window.
When you request a quote, lenders will ask for your income, debts, down payment amount, and the price of the home you're buying. They'll also ask whether you want a rate quote or a rate lock. A quote is free and valid for a few days; a lock reserves that rate for you (usually 30 to 45 days) and typically costs a small fee or is built into the rate itself. Don't lock until you're ready to move forward.
Compare the Loan Estimate document, not just the rate number. The Loan Estimate shows the interest rate, the annual percentage rate (APR), closing costs, and monthly payment. The APR includes the rate plus fees, so it's a better comparison tool than the rate alone. A lender with a 0.25 percent lower rate but $2,000 more in fees may actually cost you more over time.
Understanding fixed-rate versus adjustable-rate mortgages
A fixed-rate mortgage keeps the same interest rate and monthly payment for the entire loan term — 15, 20, or 30 years. Your payment never changes, which makes budgeting predictable. The tradeoff is that fixed rates are higher than the starting rate on an adjustable mortgage.
An adjustable-rate mortgage (ARM) starts with a lower rate for an initial period — commonly 3, 5, 7, or 10 years — then adjusts annually or semi-annually based on a market index. After the initial period ends, your payment can rise significantly. A 5/1 ARM, for example, has a fixed rate for five years, then adjusts every year after that. If rates have risen, your payment rises with them.
An ARM only makes sense if you plan to sell the home or refinance before the rate adjusts. If you're staying in the home for 10 years or more, a fixed rate is usually safer because you're protected from future rate increases. Ask the lender for a worst-case scenario: what would your payment be if the rate hit its cap? If that number would strain your budget, a fixed rate is the better choice.
How credit score and down payment affect your rate
Lenders typically offer their best rates to borrowers with credit scores of 740 or higher. Between 700 and 739, you may see a rate 0.25 to 0.5 percent higher. Below 700, the gap widens. A 50-point difference in credit score can mean tens of thousands of dollars in extra interest over 30 years.
If your score is below 740, you have options. Paying down existing debt lowers your debt-to-income ratio and can improve your score within weeks. Disputing errors on your credit report (which you can do for free through Equifax, Experian, or TransUnion) sometimes raises your score quickly. Waiting a few months for negative items to age also helps. Even a 20 or 30-point improvement can move you into a better rate tier.
Down payment size also affects rate. A 20 percent down payment typically gets you the best rate and avoids private mortgage insurance (PMI). A 10 percent down payment may carry a rate 0.25 to 0.5 percent higher. Below 5 percent down, the gap widens further. If you can't reach 20 percent, saving an extra 5 or 10 percent before you buy can lower your long-term cost more than rushing to buy now.
Points, fees, and the true cost of a loan
Lenders offer a choice: pay points upfront to lower your rate, or take a higher rate and pay fewer points. One point equals 1 percent of the loan amount. On a $300,000 loan, one point costs $3,000. Paying one point might lower your rate by 0.25 percent.
Points make sense only if you plan to stay in the home long enough to recoup the upfront cost. If you pay $3,000 in points to save $50 per month, you break even after 60 months (five years). If you sell in three years, you've lost money. If you stay 10 years, you've saved $3,000 and more.
Closing costs include appraisal fees, title insurance, underwriting fees, and origination fees. These typically range from 2 to 5 percent of the loan amount, though this varies by lender and location. Some lenders advertise "no closing cost" loans, but they usually roll the costs into a higher rate instead. Compare the total cost, not just the rate.
When to lock your rate and when to float
A rate lock reserves your rate for a set period, usually 30 to 45 days. Once you lock, your rate won't change even if market rates rise. The cost of locking is either a fee paid upfront or a slightly higher rate. If you're confident rates will rise, locking protects you. If you think rates will fall, floating (not locking) lets you benefit from a drop.
Most borrowers lock as soon as they find a rate they're comfortable with, especially if they're close to making an offer on a home. The risk of rates rising between now and closing is usually higher than the potential savings from waiting. If you're still shopping for a home and closing is months away, floating may make sense, but ask your lender what the cost of locking later will be.
If you lock and rates fall before closing, some lenders offer a "float down" option that lets you lock in the lower rate. This usually costs a fee or requires you to extend your lock period. Read the lock agreement carefully to understand what happens if rates move in either direction.
Comparing loan estimates side by side
The Loan Estimate is a standardized form lenders must provide within three days of your application. It shows the interest rate, APR, loan amount, down payment, monthly payment (principal and interest only), property taxes, homeowners insurance, and all closing costs itemized.
Create a simple table with columns for each lender and rows for: interest rate, APR, loan amount, down payment, monthly payment, total closing costs, and any points or fees. The APR column is the most important comparison because it includes both rate and fees. A lender with a 3.5 percent rate and $2,000 in fees may have a higher APR than a lender with a 3.6 percent rate and $500 in fees.
Pay attention to the "Estimated Cash to Close" line, which tells you how much money you need to bring to closing. This includes your down payment plus closing costs. Some lenders offer to cover part of closing costs in exchange for a higher rate; whether that's worth it depends on whether you have the cash available and how long you plan to keep the loan.
Frequently Asked Questions
How often do mortgage rates change?
Rates change daily and sometimes multiple times per day based on market conditions and lender pricing. The broader market rate (set by the Fed and bond markets) moves slowly, but individual lenders adjust their offerings constantly. This is why shopping across multiple lenders on the same day can show you different rates.
Can I negotiate my interest rate with a lender?
Yes, especially if you have a strong credit score and a large down payment. Lenders have some flexibility in pricing, and if you have competing offers from other lenders, you can ask them to match or beat a rate. Be direct: "I have a quote from another lender at 3.5 percent. Can you do better?" Some will, some won't.
What's the difference between APR and interest rate?
The interest rate is what you pay to borrow the money. The APR includes the interest rate plus lender fees, points, and other costs, expressed as an annual percentage. APR gives you a more complete picture of the true cost, which is why it's better for comparing loans across lenders.
Should I get preapproved before shopping for homes?
Yes. Preapproval shows sellers you're a serious buyer and gives you a clear budget. It also locks in a rate for 30 to 45 days, so you know what your payment will be. Preapproval is not the same as final approval — that comes after the home inspection and appraisal — but it moves you forward faster once you find a home.
What if my rate quote expires before I'm ready to close?
You can ask the lender for a new quote, but rates may have changed. If rates have risen, your new quote will be higher. If they've fallen, you'll get a better rate. You can also ask about extending your lock period, though this usually costs a fee or requires accepting a slightly higher rate.