What Is a Mortgage Rate?

A mortgage rate is the interest charged for a home loan represented as an annual percentage. Mortgage rates change with the economic conditions that prevail at any given time. However, the mortgage rate that a homebuyer is offered is determined by the lender and depends on the individual's credit history and financial circumstances, among other factors.

Consumers can choose from variable-rate or fixed-rate mortgages. A variable rate goes up or down with the fluctuations of national borrowing costs and alters the individual's monthly payment for better or worse. A fixed rate remains the same for the life of the mortgage. The prevailing mortgage rate is a primary consideration for homebuyers seeking to purchase a home using a loan. The rate a homebuyer gets has a substantial impact on the amount of the monthly payment that they will pay.

Mortgage rates are highly sensitive to economic conditions. Since 1980, average mortgage rates for a 30-year fixed-rate mortgage have hit a high of 18.63%, during a period of runaway inflation in 1981, and a low of 2.67% in 2020, in the early days of the COVID-19 pandemic. At the end of May 2025, the average national rate was 6.89%.

How much does the interest rate matter? Say you want to buy a house that costs $400,000. You put $80,000, or 20%, down. You need to finance $320,000. A mortgage calculator makes this easy.

Your monthly payment, not including property taxes or home insurance, on a 30-year mortgage would be:

• $1,293 at the historic low 2.67% interest rate
• $2,105 at the mid-2025 average 6.89% interest rate
• $4,987 at the historic high 18.63% interest rate

Determining a Mortgage Rate

A lender assumes a level of risk when it issues a mortgage, for there is always the possibility a customer may default on the loan. There are a number of factors that go into determining an individual's mortgage rate, and the higher the risk, the higher the rate. A high rate ensures the lender recoups the initial loan amount at a faster rate in case the borrower defaults, protecting the lender's financial investment.

The borrower's credit score is a key component in assessing the rate charged on a mortgage and the size of the mortgage loan a borrower can obtain. A higher credit score indicates the borrower has a good financial history and is more likely to repay debts. This allows the lender to lower the mortgage rate because the risk of default is deemed to be lower.

Is a Fixed-Rate Mortgage or a Variable Rate Mortgage Better?

A fixed-rate mortgage gives you security. Your payment will never go up, no matter what happens to interest rates in the world outside. If rates go down, you can refinance.

A variable-rate mortgage usually has a slightly lower interest rate to start, keeping your costs low at a time when you might be squeezed for cash. That's because the bank is betting that interest rates will go up, while you're betting they'll go down. If you lose that bet, your monthly payment will go up, and you won't have the option of refinancing until they go down again.

NMLS ID 394275 | DRE ID 01769353

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