How Mortgage Loan Interest Rates Are Determined

Mortgage Loan Rate Benchmarks

A mortgage loan is a long-term debt in which the 10-Year Treasury Bill is used as a benchmark for determining appropriate interest rates. A 30-Year mortgage rarely lasts longer than about ten years before being paid off or refinanced. The closest benchmark, which has similar risks, is the 10-Year Treasury Bill. Because mortgages carry more risk of default or early repayment, mortgage rates must be priced higher to compensate for that risk. The average spread or mark up above the secured Treasury ranges from 2.000%–2.500%. That margin widens and contracts with a range of market conditions.