What Controls Mortgage Rates? Key Factors Every Homebuyer Should Know

Last updated April 11, 2026 by Tim Stacey, Stacey Solutions powered by Xpert Home Lending, Inc NMLS 2179191.

The big-picture forces that move rates

Mortgage rates don’t exist in a vacuum. They’re connected to broader economic forces that shift daily. Here are the main drivers:

The bond market

Most fixed-rate mortgages are tied to the yield on 10-year U.S. Treasury bonds. When bond yields go up, mortgage rates tend to follow. When yields drop, rates usually come down too. Bond yields move based on investor demand, economic outlook, and global events. When investors feel uncertain about the economy, they buy more bonds (pushing yields down), which can lower mortgage rates. When confidence is high, they sell bonds (pushing yields up), and rates rise.

Inflation

Inflation is one of the biggest enemies of low mortgage rates. When inflation rises, lenders need higher interest rates to maintain their real return. If inflation is running at 4% and a lender offers a 5% mortgage rate, their real return is only 1%. Higher inflation expectations push rates up across the board.

Federal Reserve policy

The Fed doesn’t set mortgage rates directly, but its actions heavily influence them. When the Fed raises the federal funds rate, borrowing costs across the economy increase, and mortgage rates tend to rise. When the Fed cuts rates, it creates downward pressure on mortgage rates. The Fed also influences rates through its purchases (or sales) of mortgage-backed securities, which directly affects the supply and demand for mortgage debt.

Economic growth and employment

Strong economic growth and low unemployment tend to push rates higher because there’s more demand for borrowing and less concern about default risk. A slowing economy or rising unemployment tends to push rates lower as investors seek safer assets like bonds.

Global events

Geopolitical uncertainty, international trade policy, and global economic conditions all play a role. When there’s instability overseas, investors often flock to U.S. Treasury bonds as a safe haven, which can push yields (and mortgage rates) down.

Personal factors that affect your rate

While you can’t control the bond market or Fed policy, you have significant control over the factors that determine your individual rate. This is where your preparation and choices make a real difference.

Credit score

Your credit score is one of the biggest factors in your rate. Higher scores get lower rates because they represent less risk to the lender. The difference between a 680 score and a 760 score can mean 0.25% to 0.5% or more on your rate. On a $450,000 loan, that translates to tens of thousands of dollars over the life of the mortgage.

Down payment and loan-to-value ratio

The more you put down, the lower your loan-to-value ratio, and the less risk the lender takes on. Borrowers who put down 20% or more typically get better rates than those putting down 5% or 10%. With a VA loan, you can put zero down and still get competitive rates because the VA guaranty reduces lender risk.

Loan type

Different loan programs carry different rates. VA loans consistently offer some of the lowest rates available because of the government backing. FHA loans also tend to have competitive rates. Conventional loans vary more based on your credit and down payment. Jumbo loans (above the conforming loan limit) typically carry slightly higher rates.

Loan term

Shorter loan terms generally come with lower rates. A 15-year fixed rate is typically 0.5% to 0.75% lower than a 30-year fixed rate. The trade-off is a higher monthly payment because you’re paying off the loan in half the time.

Property type and use

Primary residences get the best rates. Second homes and investment properties come with rate premiums because the risk of default is higher when the property isn’t your primary home. Multi-unit properties (duplexes, triplexes, fourplexes) also carry slightly higher rates than single-family homes.

What you can do to get the best rate

You can’t time the market perfectly, but you can put yourself in the strongest position possible:

Work on your credit early. If you’re planning to buy in six months to a year, start monitoring your credit now. Pay down revolving balances, avoid opening new accounts, and dispute any errors on your reports. Even a 20-point improvement can make a meaningful difference in your rate.

Save for a larger down payment. If you can move from 10% down to 15% or 20%, you’ll often qualify for a better rate and avoid PMI on a conventional loan.

Choose the right loan program. If you’re an eligible veteran, the VA loan is almost always worth exploring. The rates are competitive and there’s no PMI, which effectively makes the rate even better on a payment basis.

Consider the right term. If you can handle the higher payment, a 15-year or 20-year mortgage will save you a lot in interest over the life of the loan.

Lock at the right time. Once you’re under contract, I’ll help you decide when to lock your rate. We’ll look at market conditions, your closing timeline, and whether rates are trending up or down.

Frequently asked questions

Does the Federal Reserve directly set mortgage rates?

No. The Fed sets the federal funds rate, which is the rate banks charge each other for overnight lending. Mortgage rates are influenced by the federal funds rate, but they’re more directly tied to the 10-year Treasury yield and mortgage-backed securities markets. Fed policy creates the conditions that push rates up or down, but it’s not a direct setting.

Why do VA loans have lower rates than conventional loans?

VA loans are partially guaranteed by the Department of Veterans Affairs, which reduces the lender’s risk. Lower risk means lenders can offer lower rates. This guarantee is why VA loans can offer zero down payment with no PMI while still maintaining competitive pricing.

How much does my credit score affect my mortgage rate?

Significantly. The difference between a score of 680 and 760 can mean 0.25% to 0.5% or more on your rate. On a $400,000 30-year mortgage, that could translate to $60 to $120 per month and $20,000 to $40,000 or more in total interest over the life of the loan.

Should I wait for rates to drop before buying?

Trying to time rates is risky. Nobody knows for certain where rates are headed. If you wait and rates drop, you might also face higher home prices and more competition. If you find the right home at a payment you can afford, it often makes sense to move forward and refinance later if rates improve. I can help you evaluate whether buying now or waiting makes more sense for your specific situation.

Can I negotiate my mortgage rate?

Not exactly, but you can shop around and compare offers. Different lenders price differently based on their costs, appetite for risk, and business volume. Getting quotes from multiple lenders (or working with a broker who shops on your behalf) is the most effective way to ensure you’re getting a competitive rate.

Let’s talk about your rate options

Understanding what drives mortgage rates is the first step. The next step is looking at your specific financial profile and figuring out which loan program and strategy will get you the best deal. I work with buyers and homeowners across Solano County, from first-time purchasers in Vacaville to veterans near Travis AFB, and I’m happy to walk you through where rates stand today and what you can expect.

Schedule a free consultation and let’s see what rate you qualify for.