Basics
7 min read
How Mortgage Rates Work
Mike Starr
Founder, MortgageWizardTools · M.S. Organizational Management
Last reviewed: August 2026
Mortgage rates are one of the most important factors in determining the cost of homeownership. Even a small difference in your interest rate can mean tens of thousands of dollars over the life of your loan.
What Determines Mortgage Rates?
Mortgage rates are influenced by several factors:
Economic Factors:
- •The Federal Reserve's monetary policy
- •Inflation rates and expectations
- •The overall health of the economy
- •Bond market yields, particularly the 10-year Treasury
Personal Factors:
- •Your credit score
- •Down payment size
- •Debt-to-income ratio
- •Loan type and term
- •Property type and location
Fixed vs. Variable Rates
Fixed-rate mortgages lock in your rate for the entire loan term, providing stability. Adjustable-rate mortgages (ARMs) start with a lower rate that can change after an initial period.
How to Get the Best Rate
- •Improve your credit score — Scores above 740 typically get the best rates
- •Save for a larger down payment — 20% or more avoids PMI
- •Shop multiple lenders — Rates can vary significantly
- •Consider buying points — Each point (1% of loan) reduces your rate
- •Lock your rate — When you find a good rate, lock it in
The Impact of Rates
On a $400,000 30-year mortgage:
- •At 6.0%: Monthly payment = $2,398 | Total interest = $463,353
- •At 6.5%: Monthly payment = $2,528 | Total interest = $510,177
- •At 7.0%: Monthly payment = $2,661 | Total interest = $557,725
That 1% difference costs almost $100,000 in additional interest over the life of the loan.
Rate Impact Summary — $400,000 Loan, 30 Years
| Interest Rate | Monthly Payment | Total Interest | Total Cost |
|---|---|---|---|
| 5.5% | $2,271 | $417,565 | $817,565 |
| 6.0% | $2,398 | $463,353 | $863,353 |
| 6.5% | $2,528 | $510,177 | $910,177 |
| 7.0% | $2,661 | $557,725 | $957,725 |
| 7.5% | $2,797 | $606,893 | $1,006,893 |
| 8.0% | $2,935 | $656,686 | $1,056,686 |