How Mortgage Interest Rates Actually Work
Your mortgage interest rate is essentially the price you pay to borrow money. It's expressed as a percentage of your loan amount, charged annually but calculated into your monthly payment.
Here's the simple breakdown: if you borrow $380,000 at 7% interest over 30 years, you'll pay approximately $530,000 in interest alone—on top of the original $380,000. Your total repayment: roughly $910,000.
That sounds scary, and honestly, it should get your attention. But here's what matters: small rate differences compound dramatically over time, which is why understanding rates—and shopping for the best one—can save you tens of thousands of dollars.
The Monthly Payment Reality
For a $380,000 loan (typical for a DFW starter home), here's how different rates affect your monthly principal and interest payment:
- 6.5% rate: $2,402/month
- 7.0% rate: $2,528/month (+$126/month)
- 7.5% rate: $2,656/month (+$254/month from 6.5%)
That $126 monthly difference between 6.5% and 7.0%? Over 30 years, it adds up to $45,360. This is why rate shopping matters.
Most first-time buyers accept the first rate they're quoted without negotiating. Lenders expect you to shop around—and they often have room to adjust their initial offer.
What Determines YOUR Specific Rate
You've probably seen advertised rates and wondered why yours might be different. That's because your rate is personalized based on several factors you can influence—and some you can't.
Factors You Can Control
Credit Score
This is the biggest factor. A score of 760+ typically gets you the best rates. Every 20-point drop can add 0.125% to 0.25% to your rate. If your score is 680 vs. 760, you might pay 0.5% to 1% more.
Down Payment Size
Putting 20% down typically gets better rates than 5% or 10% down. Larger down payments mean less risk for the lender, so they reward you with lower rates.
Debt-to-Income Ratio (DTI)
If your monthly debts (including the new mortgage) exceed 43% of your gross income, you'll likely face higher rates or loan denial. Lower DTI equals lower rates.
Loan Type
Conventional loans often have slightly lower rates than FHA loans (though FHA has lower down payment requirements). VA loans typically offer the best rates for eligible veterans.
Factors You Can't Control (But Should Understand)
The Federal Reserve: When the Fed raises or lowers rates, mortgage rates generally follow—though not directly or immediately.
Economic Conditions: Inflation, employment data, and bond market performance all influence where mortgage rates land on any given day.
Lender's Margin: Each lender adds their profit margin to the base rate. This is why the same borrower can get different rates from different lenders on the same day.
APR vs. Interest Rate: The Difference That Matters
This confuses almost everyone, so let's clear it up.
Interest Rate: The base percentage you pay annually on your loan principal. This directly determines your monthly payment.
APR (Annual Percentage Rate): The "true cost" of borrowing, including the interest rate PLUS lender fees, points, and other loan costs spread over the loan term.
Why APR Is Your Comparison Tool
Imagine two lenders offer you loans for the same amount:
- Lender A: 6.75% interest rate, 7.1% APR
- Lender B: 7.0% interest rate, 7.15% APR
At first glance, Lender A's lower interest rate looks better. But their higher APR tells you they're charging more in fees. When you compare the APRs (7.1% vs. 7.15%), the difference is much smaller than the interest rates suggested.
Use APR to compare loan offers. Use the interest rate to understand your monthly payment.
Should You Buy Points? (Probably Not)
Mortgage points (also called "discount points") let you pay money upfront to lower your interest rate. One point costs 1% of your loan amount and typically reduces your rate by 0.25%.
The Math on Points
On a $380,000 loan:
- One point costs $3,800 upfront
- It might lower your rate from 7.0% to 6.75%
- Monthly savings: approximately $63
- Break-even time: 60 months (5 years)
- You're certain you'll stay in the home for 7+ years
- You have extra cash beyond your down payment and emergency fund
- You want to lower your monthly payment rather than invest that money elsewhere
- You might move or refinance within 5 years (most first-time buyers do)
- The money would deplete your reserves
- You could use that cash for a larger down payment instead (often better value)
For most DFW first-time buyers, points aren't worth it. You're better off keeping cash for moving expenses, furniture, and the inevitable "surprise" costs of homeownership.
15-Year vs. 30-Year Mortgages
This decision comes down to one question: do you want lower monthly payments or do you want to pay less total interest?
The Comparison (on $380,000 loan)
30-Year at 7.0%
Monthly payment: $2,528
Total interest paid: ~$530,000
Total paid over life of loan: ~$910,000
15-Year at 6.5%
Monthly payment: $3,310
Total interest paid: ~$216,000
Total paid over life of loan: ~$596,000
The 15-year option saves you over $314,000 in interest. But your monthly payment is $782 higher.
Which Should You Choose?
Choose 30-year if:
- You want lower required payments and more flexibility
- You'd rather invest the difference (potentially earning more than you save in interest)
- Your income might fluctuate
- You want emergency "breathing room" in your budget
Choose 15-year if:
- You can comfortably afford the higher payment
- You're older and want the mortgage paid before retirement
- You value being debt-free over investment returns
- You have excellent job security
Take a 30-year mortgage but make extra principal payments when you can. You get flexibility with the option to accelerate payoff.
Rate Locks: Protecting Your Rate
Once you find a rate you like, you can "lock" it—meaning the lender guarantees that rate for a specific period, usually 30-60 days, while you close on your home.
How Rate Locks Work
When you lock your rate:
- Your rate is guaranteed even if market rates go up
- If rates go down, you're stuck with your locked rate (usually)
- Locks typically last 30, 45, or 60 days
- Longer locks may cost more (slightly higher rate)
When to Lock
Lock your rate when:
- You have a signed purchase contract
- You're comfortable with the current rate
- Rates seem to be trending upward
- You're within 45-60 days of your expected closing date
If your lock expires before closing, you'll need to pay for an extension or accept the current market rate.
Float-Down Options
Some lenders offer "float-down" provisions that let you lock in a lower rate if the market drops significantly. This usually costs extra, but ask your lender if it's available.
Adjustable-Rate Mortgages (ARMs): Are They Right for You?
An ARM starts with a lower fixed rate for an initial period (usually 5, 7, or 10 years), then adjusts periodically based on market conditions.
How ARMs Are Named
A "5/1 ARM" means:
- Fixed rate for the first 5 years
- Rate adjusts once per year after that
- Lower initial rate than fixed mortgages (sometimes 0.5% to 1% lower)
- Lower initial monthly payments
- Good if you're confident you'll move or refinance within the fixed period
- Payment uncertainty after the fixed period
- Rate could increase significantly
- Harder to budget long-term
For most first-time buyers, a 30-year fixed mortgage provides more security and peace of mind. ARMs can make sense in specific situations, but the savings rarely outweigh the risk for buyers who aren't certain about their 5-year plans.
Putting Today's Rates in Perspective
If you think rates are "too high" right now, consider the historical context:
- 1981: Rates peaked at 18.63%
- 1990s average: 7% to 9%
- 2000s average: 5% to 7%
- 2010-2020: Historic lows, 3% to 5%
- 2020-2021: All-time lows around 2.5% to 3%
- Today: 6.5% to 7.5% range (as of late 2025)
The 2020-2021 rates were a historic anomaly, not the norm. Current rates, while higher than recent years, are actually normal by historical standards. Millions of Americans built wealth buying homes at 7%, 8%, and even higher rates.
The real question isn't "Are rates good?" It's "Can I comfortably afford the monthly payment?" If yes, today's rate is the right rate for you.
Your Rate-Lowering Action Plan
You have more control over your rate than you think. Here's what to focus on:
Before Applying (3-6 months out)
- Check your credit score and address any errors
- Pay down credit cards to below 30% utilization
- Don't open new credit accounts
- Build your down payment—20% gets better rates
When Shopping for Lenders
- Get quotes from at least 3 lenders on the same day
- Compare APRs, not just interest rates
- Ask each lender: "What would it take to get a lower rate?"
- Negotiate—many lenders will match competitors
Most buyers don't realize this, but your interest rate isn't set in stone. Lenders have room to adjust, especially if you have strong credit or are comparing offers. Never accept the first rate without asking: "Is there any way to get this lower?"