Mortgage Rates and Prices

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Borrowers often ask Orion's brokers how mortgage rates are derived, and how mortgage prices are determined. And experienced brokers will inform their clients that there are two basic sets of rate and price determinants that borrowers should be aware of which may clear up some of the confusion for monthly mortgage payments.

The first set of components that determine a particular mortgage's rate and price is primarily quantitative, made up of numbers, ratios, and formulas, many of which come straight from Fannie Mae and Freddie Mac.

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Mortgage rates are derived from prices on securities backed by those same mortgages, and those prices are a function of supply and demand (supply from lenders, and demand by investors). The value of servicing the loan is added, which includes how long the loan will be on the books, the property's state and foreclosure laws, the likelihood of delinquency, etc. Orion's brokers doing business in more than one state have probably seen this.

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But that is not all. The key to margins over the past few years has been capacity. What does that mean? Orion, or any broker, basically can control the demand for its products by changing the pricing. If a lender or broker wants to slow things down because of capacity constraints, it can make its prices worse as we saw throughout much of 2020 and early 2021. If a company wants to adjust its competitive position in the marketplace, it changes its price. If a company wants to increase or decrease its profit margins, it adjusts its price. Finally, if a company wants to adjust its market share, it adjusts its price. In these respects, lenders are no different than any other for-profit business.

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How Are Mortgage Interest Rates Determined?

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The overall landscape of mortgage rates and their frequent fluctuations are influenced by broader economic forces beyond just your lender.

Mortgage rates are not set by a single entity; instead, they emerge from a complex interplay of economic factors. Lenders typically determine their rates based on the returns they require to profit, taking into account risks and costs which helps determine a borrower's monthly mortgage payment.

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One key factor is the 10-year Treasury notes, also known as T-notes. These are securities issued by the U.S. government and are considered low- to no-risk due to government backing. Investors purchase them at a yield to maturity, or yield, which reflects their confidence in the economy. In times of uncertainty, more investors gravitate towards safer options like Treasury's, leading to a decrease in yields. This yield fluctuation often correlates with interest rates on various financial products, including 30-year fixed-rate mortgages.

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Additional Market Factors Influencing Mortgage Interest Rates

Inflation

Inflation plays a significant role. During periods of high or rapid inflation, investors typically seek higher bond yields because the returns they earn have diminished purchasing power. This affects the yields on Treasurys, MBS, and consequently, the rates offered to mortgage borrowers.

Federal Reserve

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While the Federal Reserve doesn't directly set mortgage rates, its monetary policy decisions do exert some influence. For instance, when the Fed increased its key benchmark rate in 2022 and 2023, mortgage rates also climbed.

However, this isn't always the case. The central bank started reducing rates in 2024, yet mortgage rates began 2025 on a higher note, reaching around 7 percent.

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Government Policies

U.S. government initiatives that encourage homeownership, such as tax credits, can boost demand for mortgages, potentially leading to increased rates.

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Geopolitical Events

International events — such as wars or significant elections — frequently impact U.S. markets.

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Personal factors impacting mortgage interest rates

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The mortgage rates we’ve discussed are reflected in the rates you see advertised and in rate surveys. However, the specific rate you receive is influenced by your credit and financial profile. Consider the following factors:

• Credit score: A higher credit score suggests a greater likelihood of repaying the mortgage, reducing risk for the lender and resulting in a lower rate for you. While a conventional loan is available with a score as low as 620, the best rates are reserved for scores of 780 or higher.
• Down payment and loan-to-value (LTV) ratio: Typically, a lower LTV ratio leads to a lower rate. The LTV ratio compares the loan amount to the home's price. For instance, a 3 percent down payment means borrowing 97 percent of the home's price, resulting in a 97 percent LTV ratio.
• Debt-to-income (DTI) ratio: Similar to the LTV ratio, a lower DTI ratio generally results in a lower rate. This ratio compares your monthly debt obligations, including the mortgage, to your monthly income to ensure financial manageability. Conventional loans are available with higher DTI ratios, but the best rates typically require a DTI of no more than 36 percent.
• Occupancy and property type: “The occupancy status, such as whether the property will be your primary home, secondary home, or investment property, significantly affects the rate,” Purohit notes. “Primary residences usually have lower rates. Additionally, property types other than single-family homes—like condos, manufactured homes, or multi-unit dwellings—often result in higher mortgage rates.”
• No-closing-cost option: Some borrowers choose to include closing costs in their mortgage rather than paying them upfront. In such cases, lenders may charge a slightly higher rate.
• Points: Paying mortgage points or discount points is an optional fee that can reduce your interest rate.

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How much do mortgage interest rates vary across lenders?

Mortgage rates can differ significantly among various lenders. This variation stems from differences in their pricing strategies, cost structures, profit margins, and risk tolerance.

“When setting prices, lenders need to consider the cost of origination and determine the margins they desire above those costs. The more efficient a mortgage provider is, the more competitive their pricing becomes.

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Local market competition also plays a role.

In regions where there is more competition among lenders, margins tend to be narrower, resulting in lower mortgage rates.

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Why do different mortgage types have different interest rates?

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“This is attributed to differences in term length, risk, and market demand,” explains Latham. “For example, fixed-rate mortgages typically have higher interest rates compared to adjustable-rate mortgages during the ARM’s fixed-rate period, as lenders of fixed-rate loans assume the risk of interest rate fluctuations over the loan's duration.”

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Similarly, government-backed FHA, VA, and USDA loans often offer lower rates due to the government guarantee or insurance that minimizes the lender's risk.

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The Bottom Line

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Lenders, when setting the price for brokers every day on their rate sheet, balance all of the above. But what most borrowers don't see, and articles don't discuss, is the huge increase in costs that all lenders face. The MBA reports that for the latest quarter, the cost to originate a loan is more than $10,000. Whether it is the increased cost of compliance due to the Consumer Finance Protection Bureau's rules and regulations, or the higher costs of originating FHA, VA, Fannie Mae, or Freddie Mac loans, or the higher cost of servicing compliance and processing foreclosures, the cost of making a loan for lenders has gone up. And unfortunately the borrower will bear the brunt of it.

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