Short term interest rates are set by the Federal Reserve. Banks then set mortgage lending rates accordingly. You can also "buy down a mortgage interest rate by 1%", you typically need to pay 1% of your total loan amount in discount points. For example, if you have a $400,000 mortgage, paying 1 point would cost you $4,000 and lower your interest rate by 0.25%. Therefore, to lower your interest rate by 1%, you would need to pay $12,000 to $16,000 at closing.