In this country it is very common to make the decision to purchase your own home. Some may call it the "American Dream", some may call it a nightmare, but either way MOST people do it. What is uncommon is for the average American to be able to purchase said home with cash in one lump sum, therefore they typically "mortgage" a portion of the cost of the new home. This means that they take out a loan and as we all know with every loan comes "interest". However, with a Mortgage loan this "interest" is determined by the "mortgage rate" and can be quite complex and very different than just your run of the mill interest rate.

What determines your mortgage rate you ask. Well, it all begins at the good ol' fashion Federal Reserve, AKA the US Government's Bank. The FED sets one main rate and it's called the Federal Funds Rate, this rate influences EVERYTHING. It is the interest rate that banks and depository institutions charge each other. It is the rate that businesses borrow money from the FED. It is the emergency money for corporations when they lack credit. It is the prime rate, or the the best rate that is available to consumers for debt ranging from credit cards to mortgages. This rate can be adusted by the FED eight times a year at the Federal Open Market Committee. Depending on what the FED Chairman and the regional Federal Reserve Governers decide, they can raise, lower or keep the rates the same.

Now we bring in the Treasury Bonds. During a process known as "open market operations", the FED buys and sells huge amounts of treasury bonds. Traders, such as banks, can participate in the FED bond market and ultimately these transactions are what makes the rates fluctuate. Once the FED raises or lowers their rates the mortgage rates become effected because we, as consumers, tend to borrow more money when the FED lowers their rates and similarly will spend less when the rates rise.

Okay, so now that we know what makes the rates rise and fall, what determines YOUR rates? Well, individual rates are determined by a number of different factors.

1. Your credit score being the top on the list. The better the credit score the better the mortgage rate. To get the best rates you would need a credit score of around 740 or higher.

2. The down payment amount. The larger the down payment the better rate you can qualify for. Not all mortgage loans have the same mortgage rates, they can change on the type of loan option that you choose. The rates for an adjustable rate mortgate (ARM) differ from an FHA loan, etc.

Since mortgage loans are such long term loans the difference in a 1% decrease of a mortgage rate can save you 10's of $1000's of dollars over the term of the loan. Now that you have a better understanding of how mortgage rates work, it's time to get out there and buy that American Dream!