Rates

Understanding Mortgage Rates

How mortgage rates are determined, what affects your rate, and strategies to lock in the best rate possible.

NMHL Team2026-01-0510 min read

How Mortgage Rates Work

Mortgage rates represent the cost of borrowing money to purchase a home, expressed as an annual percentage. Even small differences in rates have enormous impacts over the life of a loan. On a $300,000 30-year mortgage, the difference between a 5.5% and 6.5% rate means roughly $200 more per month and over $70,000 more in total interest paid. Rates are influenced by broad economic factors like Federal Reserve policy, inflation, employment data, and bond market activity. The 10-year Treasury yield is particularly important as mortgage rates tend to track it closely, though they are typically 1.5-2.5% higher.

A 1% difference in interest rate on a $350,000 loan over 30 years equals approximately $75,000 in additional interest costs.

Factors That Affect Your Rate

Your individual mortgage rate is determined by a combination of market conditions and personal financial factors. Credit score is the single biggest personal factor, with borrowers scoring 740+ receiving the best rates. Your down payment size matters because larger down payments reduce lender risk and result in lower rates. The loan type affects rates, with VA loans typically offering the lowest rates followed by conventional and then FHA. Loan term matters too: 15-year loans carry lower rates than 30-year loans. Property type, loan amount, and your debt-to-income ratio also play roles in rate determination.

Key Tips

  • Improving your credit score by even 20 points before applying can save thousands over the loan term
  • Putting 20% or more down not only eliminates PMI but also typically secures a lower interest rate
  • Paying discount points upfront (each point costs 1% of the loan and typically reduces the rate by 0.25%) can make sense if you plan to stay long term

Fixed vs. Adjustable Rates

Fixed-rate mortgages lock in your interest rate for the entire loan term, providing payment predictability. Adjustable-rate mortgages (ARMs) start with a lower introductory rate that adjusts after an initial period, typically 5, 7, or 10 years. A 5/1 ARM has a fixed rate for 5 years, then adjusts annually. ARMs can be attractive if you plan to move or refinance before the adjustment period begins. However, if rates rise, your payments could increase significantly. Fixed rates provide peace of mind while ARMs offer lower initial payments with more risk. Your choice depends on how long you plan to keep the mortgage and your comfort with payment variability.

ARMs typically start 0.5-1.0% lower than comparable fixed rates. On a $400,000 loan, that initial savings can be $200-$400 per month during the fixed period.

How to Shop for the Best Rate

Rate shopping is one of the most effective ways to save money on your mortgage. Studies show that borrowers who get quotes from at least three lenders save an average of $1,500 over the life of their loan. When comparing rates, look at the annual percentage rate (APR) which includes the interest rate plus fees, giving you a more complete cost picture. Get quotes on the same day for accurate comparisons since rates change daily. Consider both the interest rate and closing costs, as some lenders offer lower rates with higher fees. Do not forget to compare loan estimates side by side and ask questions about any fees you do not understand.

Key Tips

  • Multiple mortgage inquiries within a 14-45 day window count as a single credit inquiry on your report
  • Compare APR rather than just the interest rate to understand the true cost of each offer
  • Ask each lender for a Loan Estimate, a standardized form that makes comparison easy
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Frequently Asked Questions

Mortgage rates change daily based on market conditions. As of early 2026, rates vary by loan type and borrower profile. The best way to know your rate is to get a personalized quote from NMHL based on your credit score, down payment, and loan type. We compare rates across multiple lenders to find you the best deal.

Locking your rate protects you from rate increases during the loan process, which typically takes 30-45 days. If rates are trending upward or you have found a rate you are comfortable with, locking is generally the safer choice. Floating means your rate could go up or down before closing. Most experts recommend locking once you have an accepted offer.

Each discount point costs 1% of the loan amount and typically reduces your interest rate by 0.25%. On a $300,000 loan, one point costs $3,000 and saves roughly $45 per month. The break-even period is about 67 months or just over 5.5 years. Points make sense if you plan to stay in the home beyond the break-even period.

Related Resources

Mortgage Refinancing Guide

Learn when and how to refinance for a better rate.

Credit Score Mortgage Guide

How your credit score directly impacts your mortgage rate.

Mortgage Pre-Approval Guide

Get pre-approved to lock in your rate sooner.

Conventional Loans

Conventional loans are not backed by government agencies and typically offer the most flexibility for qualified borrowers. With options for as little as 3% down and the ability to cancel mortgage insurance, conventional loans are ideal for borrowers with good credit.

FHA Loans

Federal Housing Administration (FHA) loans are government-backed mortgages designed to help first-time homebuyers and those with less-than-perfect credit achieve homeownership. With lower down payment requirements and flexible credit guidelines, FHA loans make homeownership accessible to more Americans.

VA Loans

VA loans are a benefit earned by veterans, active-duty service members, and eligible surviving spouses. Backed by the Department of Veterans Affairs, these loans offer unmatched benefits including no down payment, no mortgage insurance, and competitive rates.

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