The Federal Reserve does not set mortgage rates, and the central bank’s decisions don’t drive mortgage rates as directly as they do other products, like savings accounts and CD rates. However, the Fed does set borrowing costs for shorter-term loans in the U.S. by moving its federal funds rate. The federal funds rate can have a knock-on effect on 10-year Treasury bond yields, which is what most mortgage rates are tied to. Basically, the Fed does not directly set mortgage rates, but its policies can influence the financial markets and movers that do.

Dig deeper into how the Federal Reserve affects mortgage rates.

There are many different types of mortgages, broadly put into three buckets: conventional, government-insured and jumbo loans, also known as non-conforming mortgages. There are also different loan terms within these categories, such as 15 years or 30 years, and different interest rate structures, generally either fixed or adjustable (also known as variable).

Conventional mortgages

Conventional loans are often ultimately bought by Fannie Mae or Freddie Mac, the big government-sponsored enterprises (GSEs) that play an important role in the mortgage lending market. They are offered by virtually every type of mortgage lender, with some programs allowing for a down payment as low as 3 percent. A conventional loan can be either conforming or nonconforming; the conforming loans are the ones backed by the GSEs.

Government-insured mortgages

FHA loans, VA loans, USDA loans

Government-insured or government-backed loans are backed by three agencies: the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans). The U.S. government isn’t a mortgage lender, but it sets the basic guidelines for each loan type offered through private lenders. Government-backed loans can be good options for first-time homebuyers as well as borrowers who have a lower down payment or smaller budget. The requirements are usually looser than those for mortgages not secured by the government (conventional mortgages). The interest rates on FHA, VA and USDA loans are usually similar to those on conventional mortgages, but fees and other costs are higher.

Non-conforming mortgages

Jumbo mortgages

Jumbo mortgages are loans that exceed federal loan limits for conforming loan amounts. For 2023, the maximum conforming loan limit for single-family homes in most of the U.S. is $726,200, and $1,089,300 in more expensive locales. Jumbo loans are more common in higher-cost areas and generally require more in-depth documentation to qualify. Jumbo loans are also a bit more expensive than conforming loans.

Fixed-rate mortgages

A fixed-rate mortgage has an interest rate that doesn’t change throughout the life of the loan. In that way, borrowers are not exposed to rate fluctuations. For example, if you have a fixed-rate mortgage with a 6.8 percent interest rate and prevailing rates shoot up the next week, year or decade, your interest rate is locked in, so you don’t ever have to worry about paying more. Of course, if rates fall, you’ll be stuck with your higher rate unless you refinance. There are many types of fixed-rate mortgages, such as 15-year fixed-rate, jumbo fixed-rate and 30-year fixed-rate mortgages.

Adjustable-rate mortgages

Adjustable-rate mortgages, or ARMs, have an initial fixed-rate period during which the interest rate doesn't change, followed by a longer period during which the rate might change at preset intervals. Unlike a fixed-rate mortgage, ARMs are affected by market fluctuations, so if rates drop, your mortgage payments will drop. However, the reverse is also true: When rates rise, your monthly payments will also rise. Generally, ARM rates are lower to start than with fixed-rate mortgages, but since they’re not locked into a set rate, you won't be able to predict future monthly payments. ARMs do come with an interest rate cap, however, above which your loan cannot rise.

Compare fixed-rate vs. adjustable-rate mortgages.

The amount you can borrow depends on a variety of factors, including how much you’re qualified for (depending on your income, among other factors) as well as what type of loan you have. Conforming mortgages have limits while jumbo loans allow borrowers to exceed those limits. It’s a good idea to figure out your budget before you start shopping for a home, so check out Bankrate’s "How much house can I afford?" calculator.

A mortgage preapproval is a statement from a lender indicating it’s prepared to help you finance a home purchase for a specific amount. The lender issues the preapproval only after deeming you’re eligible based on a review of your credit and finances.

Getting preapproved is one of the first steps in the homebuying process. Without a preapproval, you won’t be able to make a successful offer on a home.

A preapproval isn’t the same as a prequalification. A prequalification might give you an idea of how much you can afford, but it doesn’t carry as much weight with sellers as a preapproval. A general rule of thumb: If you’re in the very early stages of preparing to buy a home, it might make sense to start with a prequalification. If you’re ready to make offers, get the preapproval.

Follow this guide to getting a mortgage preapproval.

Lenders reserve their most competitive rates to borrowers with excellent credit scores — usually 740 or higher. However, you don’t need spotless credit to qualify for a mortgage. Loans insured by the Federal Housing Administration, or FHA, have a minimum credit score requirement of 580, although you’ll probably need a score of 620 or higher to qualify with most lenders. (While FHA loans offer competitive rates, the fees are steep.)

To score the best deal, work to boost your credit score above 740. While you can get a mortgage with poor or bad credit, your interest rate and terms may not be as favorable.

Find out more about what credit score requirements to buy a house.

Mortgages have varying minimum down payment requirements. For a conventional loan, you’ll need at least 3 percent to 5 percent down, depending on whether it has a fixed or adjustable rate; and for an FHA loan, at least 3.5 percent down or at least 10 percent down if your credit score is 579 or lower. If you’re eligible for a USDA or VA loan, you won’t need to put any money down.

While these minimums can help you get into a home sooner, the higher your down payment, the lower your mortgage rate and the less you’ll need to pay in mortgage insurance premiums. If you can put 20 percent down, you won’t pay any mortgage insurance at all, and likely get the most favorable rates.

Find out about down payment assistance.

Mortgage points, also referred to as discount points, help homebuyers reduce their monthly mortgage payments and interest rates. A mortgage point is most often paid before the start of the loan period, usually during the closing process. It's a type of prepaid interest made on the loan. Each mortgage point typically lowers an interest rate by 0.25 percentage points. For example, one point would lower a mortgage rate of 6 percent to 5.75 percent.

The cost of a point depends on the value of the borrowed money, but it's generally 1 percent of the total amount borrowed to buy the home.

Buying points upfront can help you save money in interest over the life of your loan, but doing so also raises your closing costs. It can make sense for buyers with more disposable cash, but if high closing costs will prevent you from securing your loan, buying points might not be the right move.

The difference between APR and interest rate is that the APR (annual percentage rate) is the total cost of the loan including interest rate and all fees. The interest rate is just the amount of interest the lender will charge you for the loan, not including any of the other costs. By capturing points and fees, the APR is a more accurate picture of how much the loan will cost you, and allows you to compare loan offers with differing interest rates and fees.

Here’s what may be included in the APR:

• Interest rate – This is simply the percentage rate paid over the life of the loan.
• Points – This is an upfront fee the borrower can opt to pay to lower the interest rate of the loan. Each point, which is also known as a discount point, costs 1 percent of the mortgage amount. So, one point on a $300,000 mortgage would cost $3,000 upfront.
• Origination fee – This is a fee — one of many closing costs — most lenders charge for creating or initiating your loan.
• Mortgage broker fees – Brokers can help borrowers find a better rate and terms, but their services must be paid for when the loan closes. This cost is shown in the APR and can vary. The broker's commission typically ranges from 0.50 percent to 2.75 percent of the loan principal.

Mortgage lenders come in all shapes and sizes, from online companies to brick-and-mortar banks — and some are a mix of both. Decide what type of service and access you want from a lender and balance that with how competitive their rates are. You might decide that getting the lowest rate is the most important factor for you, while others might go with a slightly higher rate because they can apply in person, for example. Some banks offer discounts to existing customers, so you might be able to save money by getting a loan where your savings account or checking account is.

If your credit is a bit tarnished, many lenders offer loans with lower down payment and credit requirements through the FHA. Veterans might find VA mortgages especially attractive.

Learn more about how to find the best mortgage lender.

Homeownership is synonymous with the American Dream, but the housing boom has pushed this goal out of reach of many. Some of the advantages and disadvantages of homeownership:

Pros

• A home is a powerful way to build wealth over time.
• Homeownership provides the certainty of knowing where you’ll live from one year to the next.
• With a fixed-rate mortgage, you know your principal and interest costs won’t change. A landlord can boost your rent when your lease is up.

Cons

• Homeownership is expensive, prohibitively so in some markets.
• Maintenance and repairs are a constant — and costly — reality for homeowners.
• As home values rise, so do insurance premiums and property taxes.

Get help deciding to rent vs. buy a home.

A mortgage rate lock freezes the interest rate. The lender guarantees (with a few exceptions) that the mortgage rate offered to a borrower will remain available to that borrower for a stated period of time. With a lock, the borrower doesn’t have to worry if rates go up between the time they submit an offer and when they close on the home.

When should I lock my mortgage rate?

Most lenders offer a 30- to 45-day rate lock free of charge. This means if the interest rate increases before your loan closes, you get the stated rate. However, if rates fall, you won’t benefit unless you restart the loan process, a costly and time-consuming endeavor.

Although some lenders offer a free rate lock for a specified period, after that period they may charge fees for extending the lock.

Get help deciding when to lock your mortgage rate.