Banks determine interest rates by starting with a benchmark set by the Federal Reserve and then adjusting up or down based on five things: your credit profile, the structure and collateral of the loan, the bank’s own cost of doing business, and how hard other lenders are competing for your business. As of early 2026, the federal funds rate sits at 3.50–3.75%, 30-year fixed mortgages average around 5.98%, and 15-year fixed mortgages average about 5.44%.1Freddie Mac. Primary Mortgage Market Survey The rate you personally receive depends on how each of those factors lines up in your file.
The Federal Reserve Benchmark
Every rate in the economy starts here. Federal law directs the Fed to manage monetary and credit conditions to promote maximum employment, stable prices, and moderate long-term interest rates.2Office of the Law Revision Counsel. 12 USC 225a – Maintenance of Long Run Growth of Monetary and Credit Aggregates Its primary tool is the federal funds rate, the rate banks charge each other for overnight loans. When the Fed moves that rate, commercial banks adjust their prime rate — the baseline for many consumer products — accordingly.
How quickly that reaches you depends on the loan. Variable-rate products like adjustable-rate mortgages and home equity lines of credit can reprice in your next billing cycle. A fixed-rate loan locks a rate at closing that doesn’t move afterward, regardless of what the Fed does later.
Your Credit Profile
Your individual financial history usually creates the largest gap between the rate you’re offered and the rate someone else gets on the same product. Banks want to predict how likely you are to repay, and they charge more to borrowers who look riskier on paper.
Credit Reports and Risk-Based Pricing
Under the Fair Credit Reporting Act, a lender can pull your credit report when you apply for credit or when it reviews an existing account.3Office of the Law Revision Counsel. 15 USC 1681b – Permissible Purposes of Consumer Reports Your payment history, outstanding balances, length of credit history, and mix of accounts feed into a risk assessment. A borrower with missed payments or high balances typically pays several percentage points more than someone with a clean record. Banks call this risk-based pricing.
Shopping matters here, and it doesn’t cost you. Credit scoring models treat all mortgage-related inquiries within a 45-day window as a single inquiry, so requesting quotes from several lenders won’t damage your score.4Consumer Financial Protection Bureau. What Happens When a Mortgage Lender Checks My Credit
Debt-to-Income Ratio
Banks also look at your debt-to-income ratio: the share of your gross monthly income that already goes to debt payments. A lower ratio signals room to take on more, which supports a lower rate. There’s no universal cutoff, but many lenders treat ratios above roughly 43% as a warning sign. The Consumer Financial Protection Bureau originally set 43% as the maximum debt-to-income ratio for qualified mortgages under federal lending rules, though that hard cap has since been replaced with price-based thresholds.5Consumer Financial Protection Bureau. General QM Loan Definition Even so, a ratio well under 43% strengthens your position with most lenders.
Loan Structure, Collateral, and Term
The loan itself shapes the rate the bank is willing to offer. Three features do most of the work.
Secured vs. Unsecured
A secured loan is backed by collateral the bank can claim if you stop paying, such as a house or a car. Because the lender has a fallback, secured loans carry lower rates. Unsecured loans like credit cards and personal loans give the bank no such backup, so the rate reflects the higher risk of total loss.
Loan-to-Value Ratio and Down Payment
For mortgages and other secured loans, the loan-to-value ratio — the amount you borrow divided by the property’s appraised value — directly affects your rate. A larger down payment lowers that ratio, which signals less risk and typically earns a better rate.6Consumer Financial Protection Bureau. What Is a Loan-to-Value Ratio and How Does It Relate to My Costs Below 20% down on a conventional mortgage, most lenders add private mortgage insurance, which raises your monthly cost even when the headline rate looks the same.
Loan Term
A longer repayment period ties up the bank’s money longer and exposes it to more economic uncertainty. That’s why a 30-year fixed mortgage carries a higher rate than a 15-year one. In late February 2026, the national average for a 30-year fixed was 5.98%, compared with 5.44% for a 15-year term.1Freddie Mac. Primary Mortgage Market Survey The shorter loan costs less in interest per dollar borrowed, though the monthly payment is higher.
Discount Points
You can buy a lower rate at closing by paying discount points. One point costs 1% of the loan amount and reduces your rate; the exact reduction varies by lender and by market. On a $350,000 mortgage, one point runs $3,500. Paying points pays off only if you keep the loan long enough for the monthly savings to exceed that upfront cost, so ask for a break-even calculation before you agree.
The Bank’s Own Costs
Once the benchmark and your risk profile are set, the bank still needs to cover its expenses and earn a profit. Two cost categories push rates higher.
Cost of Funds
Banks fund loans largely with money from depositors. If a bank pays depositors 4.00% on savings and certificates of deposit, it must charge borrowers more than 4.00% on loans or lose money on every dollar lent. The gap between what the bank pays for its capital and what it earns on loans is called the spread. When deposit rates rise across the industry, loan rates follow.
Overhead
Salaries, branch costs, cybersecurity, compliance, and technology all factor into the rate. A portion of the interest on every loan covers those expenses. Lenders with lower overhead, such as online-only banks with no branches, can sometimes pass the savings along, which is one reason internet lenders often undercut traditional banks.
Relationship Discounts
Some banks reduce rates for existing customers who keep deposit or investment balances above certain thresholds. If you already hold substantial balances at a bank, ask about relationship pricing before you finalize a loan. The discount can run from an eighth to a half of a percentage point depending on your balances and the institution.
Competition and Rate Locks
When lenders are chasing the same qualified borrowers, they trim their margins to win business. Two banks looking at the same file can quote noticeably different rates depending on how hungry each is for new loans. Combined with the 45-day inquiry window, that’s why requesting several quotes is worth the time.
Once you like a rate, you can ask for a rate lock, an agreement that freezes it for a set period while you finish the loan. Locks are commonly available for 30, 45, or 60 days.7Consumer Financial Protection Bureau. What’s a Lock-in or a Rate Lock on a Mortgage If closing slips past the lock’s expiration, the rate is no longer guaranteed. Extending an expired lock usually costs extra, so ask upfront what happens if the timeline slides.
Interest Rate vs. APR
Compare loan offers on both numbers. The interest rate is the cost of borrowing expressed as a percentage of the principal. The annual percentage rate folds in lender fees like origination charges, giving you a fuller picture of what the loan actually costs per year.8Consumer Financial Protection Bureau. What Is the Difference Between a Loan Interest Rate and the APR Two lenders can advertise the same interest rate, but if one charges higher fees, its APR will be higher — the more expensive loan. Compare APR to APR, not APR to interest rate.
What Banks Cannot Use
Banks have wide discretion to price loans based on financial risk, but federal law draws firm lines around what they cannot consider. The Equal Credit Opportunity Act makes it illegal for a creditor to set different rates or terms based on race, color, religion, national origin, sex, marital status, or age. Lenders also cannot penalize you for receiving public assistance income or for exercising your rights under consumer credit protection laws.9Office of the Law Revision Counsel. 15 USC 1691 – Scope of Prohibition
For mortgage loans, the Fair Housing Act adds another layer. Federal regulations explicitly prohibit lenders from setting different rates, durations, or other terms on housing-related financing because of race, color, religion, sex, disability, familial status, or national origin.10eCFR. Part 100 – Discriminatory Conduct Under the Fair Housing Act If you believe a lender offered you worse terms for any of these reasons, you can file a complaint with the Consumer Financial Protection Bureau or the Department of Housing and Urban Development.
A Note on Legal Rate Caps
Most states have usury laws that cap the interest a lender can charge, but the practical protection is narrower than borrowers often assume. Caps vary widely by state and by product, from as low as 5–6% for certain loan types to above 30% on others. More important, federal law lets a national bank charge interest at the rate permitted by the state where the bank is located, regardless of where you live.11Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest on Loans, Discounts and Purchases A bank headquartered in a state with generous limits can lend nationwide at those higher rates. Federal law also preempts state usury limits entirely for first-lien residential mortgages originated after March 31, 1980.12eCFR. Part 190 – Preemption of State Usury Laws So whether a usury cap actually protects you depends on the loan type and the lender’s charter, not just the state you’re borrowing in.