Mortgage Rates
General mortgage rates are generally determined by a number of factors, including, but certainly not limited to, individual mortgage lenders, banks, mortgage packagers like Freddie Mac and Fannie Mae, the Federal Reserve and even mortgage consumers, who collectively create the "demand" side of the supply and demand equation.
Mortgage Rates - the Supply Side
To get a better handle on how and why rates rise and fall, however, it is best to first understand the "supply" side of the equation. Mortgage originators (your broker or bank) can either hold a mortgage loan they've made, i.e. - they "portfolio" it, or they can pass it along (sell it) to a third party. More often than not, the mortgage originator will sell the mortgage to a third party, which will in turn package that mortgage loan with many others into what is referred to as a "mortgage-backed security". A security, in this instance, is just like the stock of a publicly-traded company - investors can buy and sell it with general ease in a public market and with great liquidity and earn a return on the investment based on the principal and interest that is paid by the mortgage borrowers.
Comparing Government Securities to Mortgages
Given the knowledge that mortgages are collectively made into investment instruments, we need only compare such mortgage-backed securities to other similar investments to determine what rate must be attained to make a mortgage attractive for an investor. Since 30-year fixed mortgages are the most basic version of all mortgage loans available, the assumption may be that U.S. 30-year Treasury Bonds would be a good comparison. However, when taking into consideration that most 30-year mortgage loans are only held for an average of about 11 years, the U.S. 10-year Treasury Bond is a much better indicator.
It's all About Risk
Finally, considering that investing in the U.S. government, for better or worse, is safer than investing in thousands of individual mortgage holders, the rate of return for mortgage-backed securities must be higher than 10-year Treasuries to be appealing to investors. In general, the 30-year mortgage rates will float about 1.5% - 2% above the 10-year T-bond. Though mortgage rates do not exactly follow government securities, one can generally ascertain the direction of mortgage rates by keeping an eye on the 10-year T-bond.