Mortgage rates

The 30-year fixed average is the most quoted number in American consumer finance. Here is where it comes from and what actually moves it.

Where the number comes from

Freddie Mac has published the Primary Mortgage Market Survey since 1971. Each week it collects rates that lenders are offering creditworthy borrowers with strong down payments, and publishes the average on Thursday. It is the closest thing the market has to an official benchmark, which is why it is the figure quoted in the news.

What moves it

• The 10-year Treasury yield. Mortgages track it more closely than any other single indicator, because both are long-dated claims on future dollars. Watch the Treasury and you can usually see mortgage moves coming.
• Federal Reserve policy. The Fed does not set mortgage rates directly, but the federal funds rate shapes the expectations that price everything else. Its influence is real but indirect.
• Mortgage-backed securities demand. Most loans are packaged and sold. When investor appetite for that paper falls, lenders must offer more to move it.
• Inflation expectations. A lender fixing a rate for thirty years is forecasting the value of money for thirty years. Higher expected inflation means higher rates.

30-year versus 15-year

The 15-year fixed almost always carries a lower rate, because the lender's money is exposed for half as long. The monthly payment is higher, but the lifetime interest is dramatically lower. Run both terms in the calculator below and compare the total-interest figure rather than the monthly payment - that comparison is where the real difference shows up.

Reading a quote properly

A rate alone is not comparable between lenders. Ask for the APR, which folds in origination fees and points, and ask how many discount points are built into the rate. A lender advertising a rate well below the benchmark is often selling points - you are paying cash up front to buy the rate down, which only pays off if you keep the loan long enough to recover the cost.