Mortgage rates explained: how rates are set and why yours is different.

"What are mortgage rates today?" is the first question almost every Texas buyer asks. It is also the wrong question. The advertised rate you see on a billboard or a Bankrate landing page is rarely the rate you will actually be quoted. Your rate depends on how rates are set in the broader market, how the lender prices your specific file, and what trade-offs you make at the closing table. This article walks through all three.

How mortgage rates are set

Mortgage rates are not directly set by the Federal Reserve. The Fed sets the federal funds rate, which is the rate banks charge each other for overnight lending. Mortgage rates correlate loosely with the federal funds rate but track much more closely with the yield on mortgage-backed securities (MBS) — bundles of mortgages traded in the secondary market.

When investors buy MBS aggressively, MBS prices rise and yields fall — and mortgage rates fall with them. When investors sell MBS or demand higher yields (because of inflation expectations, Treasury yield movements, or general risk-off sentiment), mortgage rates rise. The MBS market moves daily; mortgage rates move with it, with a lag of hours to a day depending on lender pricing cycles.

Layer on top of the MBS yield: the lender's margin (their cost to originate, service, and earn a profit), the agency guarantee fee (paid to Fannie Mae, Freddie Mac, FHA, VA, or USDA depending on the program), and any pricing adjustments specific to your file. The "advertised rate" you see in a marketing email is typically the lowest-pricing scenario the lender can construct — top FICO, low LTV, single-family primary, no LLPA hits.

Why your rate differs from the advertised rate

Lenders quote two numbers: a base rate and a set of Loan-Level Price Adjustments (LLPAs) that move the rate up or down based on your specific file. The bigger ones:

• FICO score. The lower your credit score, the higher your rate. The pricing tiers step up at 760, 740, 720, 700, 680, 660, and 640 — and the spread between top and bottom can exceed a full percentage point.
• Loan-to-value ratio (LTV). Higher down payment = lower LTV = better pricing. The biggest pricing breaks happen at 80% LTV (where conventional PMI drops off), 75%, and 60%.
• Loan type. FHA, Conventional, VA, USDA, and Jumbo all have their own pricing matrices. VA and USDA frequently price below Conventional for borrowers who qualify; Jumbo can be either better or worse than Conventional depending on the investor.
• Occupancy. Primary residence prices best. Second home carries an LLPA hit. Investment property carries a much larger LLPA hit.
• Property type. Single-family detached prices best. Condos (especially non-warrantable) and 2–4 unit properties price worse.
• Loan purpose. Purchase typically prices best. Rate-and-term refinance is similar. Cash-out refinance carries the largest LLPA hit of the three because investor risk is materially higher on cash-out files.
• Loan amount. Very small loans (under $100K) and very large loans (jumbo territory) often price differently than the middle of the market.

The advertised rate is what the lender can offer to a single-family primary purchase at 25% down with a 780 FICO. Your file is unlikely to be all of those things at once — and that is why the rate quoted on your loan estimate is probably different.

Discount points and lender credits

For any given file, a lender can quote a range of rate / cost combinations. Buying down the rate by paying discount points lowers the rate; taking lender credits raises the rate but offsets your closing costs. The trade-off is real and worth modeling on every file.

A discount point is 1% of the loan amount paid at closing in exchange for a lower interest rate (typically 0.25% lower per point, but the spread varies by lender and market conditions). On a $400,000 loan, one point costs $4,000 at closing.

The math is a break-even calculation: divide the closing-cost increase by the monthly payment savings. If the break-even is 4 years and you plan to hold the loan for 10, paying points usually wins. If the break-even is 7 years and you plan to refinance in 3, paying points loses.

Lender credits work in reverse. The lender gives you a credit at closing in exchange for accepting a slightly higher rate. This can be the right move when you are short on cash to close, when you expect to refinance soon, or when the break-even on points runs longer than your holding period.

A good loan officer should quote you at least three rate / cost combinations on every file: par rate (no points, no credits), buy-down rate (points paid for a lower rate), and credit rate (higher rate offset by closing-cost credits). If you only get one quote, ask for the others.

Rate locks

Once you have a property under contract, your rate gets locked. The lock guarantees the rate quoted on a specific date for a specific period — typically 15, 30, 45, or 60 days. Common practice in Texas is a 30- or 45-day lock to cover a standard 30-day close with a few days of cushion.

Longer locks cost more (the lender takes more rate risk by guaranteeing the rate further out). Shorter locks cost less. A 30-day lock typically prices at par; a 60-day lock might cost 0.125%–0.25% in rate. We choose the shortest lock that still safely covers your close date.

Most lenders allow a one-time "float-down" if rates fall meaningfully after you lock — usually subject to a minimum drop (e.g., 0.25%) and a fee. Float-downs are not automatic; you have to ask. We watch the market on every locked file and trigger float-downs when they make sense.

What if rates fall but you have not yet locked? You can wait — but a lock-extension after expiry costs more than locking on time. The standard advice is to lock when you are under contract. Trying to time the bottom of the rate market between contract and close is a coin flip with real downside if you guess wrong.

How Texas property taxes affect APR

Texas has no state income tax, which means the state funds itself heavily through property taxes. Texas property tax rates run higher than most states — typically 1.5%–3% of assessed value depending on the taxing jurisdiction (county, city, school district, MUD, special district). A $400,000 home in many DFW suburbs carries $8,000–$12,000 per year in property taxes.

Property taxes do not directly affect your interest rate, but they affect APR (Annual Percentage Rate) because APR includes the full cost of credit: rate plus fees plus prepaid escrow items spread over the loan term. The escrow line for property taxes shows up in your monthly payment as a separate component, but it raises your total monthly out-of-pocket and can make the same rate look more expensive on a Texas file than on a comparable file in a low-tax state.

Two practical implications. First, when comparing loan estimates across lenders, compare the rate AND the APR — and check that the property tax estimate is consistent across estimates. A lender quoting an artificially low tax estimate will produce a misleadingly low APR. Second, when budgeting for monthly payment, build the full Texas tax burden into the math — not just the rate-times-balance interest payment.

What you can actually control

Most of the inputs to your rate are out of your control: the federal funds rate, the MBS market, the agency guarantee fee, the LLPA grid for your loan type. What you can control:

• Your FICO score. Cleaning up small balances, disputing inaccuracies, and avoiding new credit lines in the 60 days before pre-approval can move your score by enough to cross a pricing tier.
• Your down payment. Pushing from 5% to 10%, or 10% to 20%, can move pricing meaningfully — especially crossing the 80% LTV line on a Conventional file.
• Your loan type. If two programs both fit, the cheaper monthly cost (rate + MI + program fees) is the right pick. We model both side by side on every file.
• Your timing on the lock. Lock when you are under contract, not before. Watch the market between lock and close so you can request a float-down if rates drop materially.
• Your broker. Different lenders price the same file differently. A broker with multiple investor relationships can shop your file and present the best of several quotes — which is the entire point of using a broker rather than going direct to a single retail lender.

Mortgage rates are the most-quoted, most-misunderstood number in the home-buying process. Understanding what drives them — and what you can actually influence — is the difference between accepting whatever a single lender quotes and structuring a file that prices fairly.