How Mortgage Rates Are Determined

Mortgage rates don’t actually start with your loan officer or even the Federal Reserve. They begin with large institutional investors, the bond market, and how your specific file is structured. If you’re self-employed, a real estate investor, or a California borrower, understanding this process can save you real money.

Summary: Mortgage rates are determined by institutional investors, the bond market, mortgage-backed securities, economic data, and your own credit and loan profile. This guide explains how rates are set, how the Federal Reserve influences them, and why Non-QM and DSCR loans behave differently—especially in California.

Table of Contents

• 1. The Bond Market Is the Foundation
• 2. The Federal Reserve’s Role
• 3. Mortgage-Backed Securities & the Spread
• 4. What Determines Your Rate
• 5. Economic Reports That Move Rates
• 6. Why Rates Change Throughout the Day
• 7. How Non-QM & DSCR Rates Are Set
• 8. What California Borrowers Should Know
• 9. When to Lock Your Rate
• 10. Why Work With ABO Capital
• 11. Frequently Asked Questions

1. The Bond Market Is the Foundation

Mortgage rates mirror the 10-Year U.S. Treasury yield because investors compare Treasury returns with mortgage-backed securities (MBS). When Treasury yields rise, MBS yields rise—pushing mortgage rates higher. When Treasury yields fall, MBS yields typically fall as well, allowing mortgage rates to come down.

2. The Federal Reserve Influences Rates — But Does Not Set Them

The Federal Reserve sets the Federal Funds Rate, which is an overnight rate banks charge each other—not the 30-year mortgage rate. However, Fed policy affects mortgage rates indirectly through inflation expectations, bond yields, and investor sentiment.

When the Fed is fighting inflation with rate hikes or “hawkish” guidance, investors demand higher yields on bonds and MBS, and mortgage rates tend to rise. When the Fed signals easing, slowing inflation, or concerns about growth, yields often fall and mortgage rates can follow.

3. Mortgage-Backed Securities & the Spread

Your mortgage is usually packaged with many others into a mortgage-backed security. Investors buying these securities want to be paid for several risks:

• Prepayment risk (you refinance or sell early)
• Default risk (borrowers not paying)
• Interest rate risk (rates changing over time)
• Inflation risk
• Liquidity risk

This shows up as a “spread” over Treasuries:

Mortgage Rate ≈ 10-Year Treasury Yield + Investor Spread

That spread often falls in the 1.5%–2.5% range, but it can widen during times of stress or uncertainty.

4. What Determines Your Individual Rate

Once the market sets the base level for rates, your own profile adjusts the actual rate you’re offered.

Credit Score

Higher credit scores usually qualify for lower rates. Lower scores add risk and pricing adjustments.

Loan Type

• Conventional / agency loans
• Non-QM loans (bank statement, 1099, asset-qualified, etc.)
• DSCR investor loans
• Portfolio and private loans
• Jumbo loans

Loan-to-Value (LTV)

Lower down payments (higher LTV) increase risk for investors and typically result in higher rates.

Property Type

• Primary residence (best pricing)
• Second home
• Investment property (higher risk)
• Commercial and mixed-use properties

Documentation Type

Full documentation usually earns the lowest rates. Alternative documentation such as bank statement loans, P&L-only loans, and DSCR loans offer more flexibility but carry additional risk and are priced accordingly.

5. Economic Reports That Move Rates

Mortgage rates react quickly to key economic reports:

• Inflation reports (CPI, PCE)
• Jobs reports (employment data)
• GDP growth
• Consumer sentiment and confidence
• Market volatility and geopolitical events

Hotter inflation and stronger-than-expected growth usually push rates higher. Softer data and easing inflation often pull rates lower.

6. Why Rates Change Throughout the Day

Because MBS trade throughout the day, lenders may update pricing multiple times. You might see:

• Morning rate sheets
• Mid-day repricing
• Afternoon repricing in volatile markets

This is why your rate quote can change even within a single day.

7. How Non-QM & DSCR Rates Are Set

Non-QM and DSCR loans are driven by private capital rather than agency pricing. Their rates depend on:

• Investor yield requirements
• Performance of similar loan pools and securitizations
• Prepayment penalties and expected loan life
• Risk concentration by geography and product type

This is why Non-QM and DSCR rates can move differently than standard 30-year fixed mortgage rates you see in headlines.

8. What California Borrowers Should Know

California—especially Los Angeles, Orange, San Diego, Ventura, and Santa Barbara counties—has higher typical loan sizes, more self-employed borrowers, and more real estate investors. That means Non-QM and DSCR programs play a bigger role here than in many other markets.

The way your loan is structured—income documentation, property type, loan amount, and LTV—has a major impact on your final rate in this environment.

9. When to Lock Your Rate

There is no perfect time, but better timing comes from watching:

• Upcoming Federal Reserve meetings
• Major inflation reports (CPI, PCE)
• Trends in the 10-Year Treasury yield and MBS prices
• Your own closing timeline and risk tolerance

You don’t have to guess. You just need someone who understands how these moving pieces affect your specific scenario.

10. Why Work With ABO Capital

At ABO Capital, we:

• Track bond markets, MBS pricing, and investor rate sheets every day
• Specialize in Non-QM, DSCR, fix & flip, construction, bridge, and commercial property loans
• Understand how to present self-employed and investor files so they make sense to capital sources
• Focus on rate, total cost, and flexibility—not just a teaser number

If you want real clarity on what today’s market means for you, a quick conversation often saves a lot of confusion.

11. Frequently Asked Questions

Does the Federal Reserve set mortgage rates?

No. The Federal Reserve influences mortgage rates through monetary policy and economic guidance, but the bond and MBS markets ultimately set the rates lenders can offer.

Why do mortgage rates change every day?

Mortgage rates change because mortgage-backed securities trade all day long. When investor demand or perceived risk changes, the pricing moves and lenders adjust their rates.

Why are Non-QM mortgage rates higher?

Non-QM loans offer more flexible underwriting and serve borrowers who don’t fit traditional guidelines, which increases risk for investors. Higher risk requires higher yields, which shows up as higher interest rates.

How are DSCR rates determined?

DSCR rates are based mainly on property cash flow, investor appetite, and broader market conditions—not your personal tax returns or W-2 income.

What affects my personal rate the most?

Credit score, loan-to-value, loan type, property type, occupancy, documentation method, and the specific investors behind your loan are typically the biggest drivers of your individual rate.