How Mortgage Interest Rates Work and What Actually Moves Them

Most people assume the Federal Reserve sets mortgage rates. The Fed influences the broader rate environment — but mortgage rates are driven by a completely different mechanism.

The Real Driver: Mortgage-Backed Securities

Mortgage interest rates are primarily driven by yields on mortgage-backed securities — bonds composed of pools of individual mortgages. When investors demand higher yields to hold these bonds, lenders must charge borrowers higher rates. When bond prices rise and yields fall, mortgage rates drop.

This market moves every business day based on economic data releases, inflation expectations, geopolitical events, and investor sentiment. It is why mortgage rates can change meaningfully from one day to the next.

How Your Profile Affects Your Rate

Beyond the base market rate, your individual rate is adjusted by loan-level price adjustments based on your credit score, loan-to-value ratio, property type, occupancy, and loan purpose.

Higher credit scores receive better rates. Lower LTV improves pricing. Investment properties carry higher rates than primary residences. Cash-out refinances typically price higher than rate-term refinances.

Fixed vs. Adjustable Rate Mortgages

A fixed-rate mortgage locks your rate for the life of the loan — typically 15, 20, or 30 years. An ARM starts with a fixed period — usually 5, 7, or 10 years — then adjusts annually. ARMs offer lower initial rates and can make sense for buyers who plan to sell or refinance before the adjustment period.

Rate Locks

Once under contract, you can lock your rate for 30 to 60 days, protecting against increases during the loan process. Locks can typically be extended for a fee if closing is delayed.

At East Coast Mortgage, we monitor rate movements daily and advise borrowers on optimal timing. Book a call to discuss your rate strategy.