Mortgage rates are primarily determined by a combination of broad market forces and personal factors related to the borrower. The key market influences include the yields on U.S. Treasury bonds, especially the 10-year Treasury note, and the prices of mortgage-backed securities (MBS) that banks sell to investors. Mortgage rates generally track the 10-year Treasury yield plus a spread that accounts for lender costs and risk premiums. This spread covers the costs of originating mortgages and the risks investors take compared to Treasury bonds. Another major factor is the federal funds rate set by the Federal Reserve, which influences overall interest rates in the economy but affects mortgage rates less directly since mortgages are long-term loans. Mortgage rates also fluctuate based on investor demand for bonds versus stocks, economic outlook, and inflation expectations. Aside from market factors, mortgage rates depend on personal financial details such as credit score, loan-to-value ratio (the down payment relative to home value), and the size of the down payment. Borrowers with higher credit scores and larger down payments typically receive lower rates because they pose less risk to the lender. In summary, mortgage rates are set based on:
- The benchmark 10-year Treasury note yield plus a spread for market and lender risk.
- Federal Reserve monetary policy indirectly affecting borrowing costs.
- Supply and demand dynamics in bond and stock markets.
- Individual borrower risk profiles including creditworthiness and down payment size.
