How are mortgage interest rates determined?

Mortgage or other interest rates are determined by the banks on cost of funds, risk and operating cost.

The Fed raises money from the markets by issuing Treasury Bonds at a specified rate. This rate at which it raises money varies depending on the economy.

Thus there are 2 rates: the rate at which banks can borrow money from the Fed, which is higher than the rate that the Fed would give banks for excess money deposited with them.

So if the cost of borrowing is less, banks can borrow this money from the Fed and loan it to individuals at a slightly higher rate that would cover their costs plus a small profit. The risk associated with a mortgage is less, and hence these would be cheaper, then say a personal loan.

If the cost of borrowing goes up, the mortgage rate will go up. If the cost of borrowing money goes down, the cost would come down.

Banks may not always borrow money to lend. If they have existing money, they can either park it with the Fed for a lower interest rate, or loan it to individuals for a rate higher than what they would have received from the Fed.