What Really Determines Your Mortgage Interest Rate
The Fed doesn't set your mortgage rate, and your credit score is only part of the story. Here are the levers you control and the ones you don't.
Two buyers can apply for a mortgage on the same day and get quotes a full half-point apart. That difference can mean hundreds of dollars a month. Here's what goes into the number, split into what the market decides and what you can influence.
What the market decides
The bond market, not the Fed
The Federal Reserve sets a short-term rate that banks charge each other overnight. Thirty-year mortgage rates track long-term bond yields, especially the 10-year Treasury and mortgage-backed securities. The Fed's decisions and inflation data influence those yields, which is why mortgage rates sometimes move before a Fed meeting, or in the opposite direction afterward.
The spread
Lenders price in their own costs and risk on top of the bond yield. When markets are volatile, that spread tends to widen.
What you can influence
| Factor | Why it matters |
|---|---|
| Credit score | Pricing usually steps in tiers. Moving from one tier to the next can change your rate or your costs noticeably. |
| Down payment (loan-to-value) | More equity means less risk to the lender. Crossing thresholds such as 20% down can also remove mortgage insurance on conventional loans. |
| Loan type | Conventional, FHA, VA and USDA loans are priced differently, as are jumbo loans above the conforming limit. |
| Loan term | A 15-year loan typically carries a lower rate than a 30-year, with a higher monthly payment. |
| Fixed vs. adjustable | An ARM may start lower but can change after the fixed period. |
| Points | You can pay upfront to "buy down" the rate. Whether it pays off depends on how long you keep the loan. |
| Debt-to-income ratio | Higher ratios can narrow your options or raise pricing. |
| Occupancy and property type | Primary homes price better than second homes or investment properties. Condos can carry extra requirements. |
| Lock period | Longer locks (common with new construction) usually cost more. |
How to get your best rate
- Shop more than one lender, on the same day. Compare the Loan Estimates line by line, especially Section A (origination charges) and any points. A lower rate with higher fees isn't always the better deal.
- Check your credit early and fix errors before you apply. Avoid opening new accounts or financing a car during the process.
- Ask about a seller-paid buydown. In a market with more negotiating room, asking the seller for a credit toward a rate buydown can do more for your monthly payment than an equal price reduction.
- Understand the lock. Know exactly when your rate is locked, for how long, and what happens if closing is delayed.
What a quarter point costs
Small differences add up. On a $400,000 thirty-year fixed loan, principal and interest is about $2,528 a month at 6.5% and about $2,594 at 6.75%. That is roughly $66 a month, or about $7,900 over ten years, for a quarter of a point.
Compare the APR as well as the rate. APR folds in points and most lender fees, so it shows what a loan costs you, not only what it advertises.
South Carolina and Charleston specifics
- Property taxes depend on how you use the home. A primary residence is assessed at 4% and a second home or rental at 6%, and the difference in the tax bill is large. Lenders build that into your payment, so tell yours how you'll use the home, and apply to the county for the owner-occupied rate after closing.
- Flood insurance counts toward what you qualify for. Get a flood quote on a specific home before you fall in love with it. A high premium can change the price range that works.
- VA loans. With Joint Base Charleston here, many buyers are eligible for VA financing, which typically needs no down payment and no monthly mortgage insurance.
- First-time buyer help. SC Housing, the state housing agency, offers down payment assistance and special loan programs for buyers who qualify. Program terms change, so ask a participating lender what's current.
- Condos. Lenders review the whole building's finances and insurance, and beachfront and older buildings sometimes don't qualify for standard loans. Check early.
The Consumer Financial Protection Bureau has free tools for comparing rates and reading a Loan Estimate in its home-buying guide.
Common questions
Does the Fed set mortgage rates?
No. The Fed sets a short-term rate. Thirty-year mortgage rates follow long-term bond yields, which often move before the Fed acts.
Does shopping several lenders hurt my credit?
Not if you do it within a short window. Credit scoring treats multiple mortgage inquiries made close together as one.
Should I wait for rates to drop?
No one can time it. If the payment works for you today, you can buy the home now and refinance later if rates fall. You can't go back and buy at today's price.
I'm happy to introduce you to local lenders I trust so you can compare. The choice is always yours.
This is general information, not financial advice. Rates and program rules change; confirm details with a licensed loan officer.
Own Charleston · 843.300.2535 · jill@owncharlestonsc.com
