How Are Home Loan Interest Rates Decided—and Can You Get a Lower One?

Jul 31

Who Sets Mortgage Rates?

You might hear people say “the Fed raised rates,” and assume that means your mortgage rate goes up too.

But here’s the truth: the Federal Reserve doesn’t set mortgage rates directly.

What the Fed does control is the federal funds rate: the interest rate banks charge each other for short-term loans. This rate affects the overall cost of borrowing money across the economy.

When inflation is high, the Fed often raises rates to cool spending and slow down price increases.

When the economy is slowing, the Fed may lower rates to make borrowing more affordable and encourage growth.

Mortgage lenders use this economic data, along with other market data, to determine what rate to offer borrowers.

Why Advertised Mortgage Rates Aren’t One-Size-Fits-All

When you see an interest rate advertised online, it's based on a borrower with:

Excellent credit (typically 740+)
Low debt-to-income ratio
A large down payment (usually 20%)
A conventional 30-year loan

But here’s the good news: You don’t have to settle for that rate. There are ways to qualify for something even better!

How to Get a Lower Home Loan Interest Rate

Here are five smart ways I help my clients secure better mortgage rates:

1. Improve Your Credit Score

Lenders reward financial responsibility. Pay off debt, make payments on time, and avoid big purchases before applying.

2. Put More Money Down

A larger down payment (15%–20%) reduces risk for the lender, which can translate to lower rates—and no PMI (Private Mortgage Insurance).

3. Buy Discount Points

Paying more upfront in exchange for a lower interest rate—called "buying points"—can save you money in the long run, especially if you plan to stay in the home.

4. Compare Lenders

Not all lenders are the same. Rates and fees vary, and I can introduce you to trusted professionals who will offer competitive terms.

5. Choose the Right Loan Type

Conventional, FHA, VA, or jumbo—different loans offer different benefits. Together, we’ll find the one that fits your needs best.