In 1862, Puget Mill Company acquired 17,000 acres (6,900 ha) in the newly-formed county, including the thickly-forested plateau where modern-day Mountlake Terrace sits and the adjacent Lake McAleer.

[8] LaPierre and Peterson named the property "Mountlake Terrace" for its plateau-like setting with views of Lake Washington and Mount Rainier, and sought to develop a low-income bedroom community for returning veterans.

[12][13] LaPierre and Peterson developed additional areas to the north and east of their initial subdivision, later adding larger homes that remained in an affordable price range for young families.

The telephone system used a party line shared between 10 homes, the water mains and septic tanks were prone to failure, and the community lacked protection due to their distance from the nearest sheriff's precinct.

[9][15] LaPierre and Peterson funded construction of a local fire station and provided a police radio to link community volunteers with the county sheriff in Everett, but response times for emergencies remained long.

An anti-incorporation bloc was formed by Mountlake Terrace residents who were opposed to increased taxes and potential costs that were previously covered by the county government.

[24][25] Within a few years of incorporating, the city government had rebuilt most of Mountlake Terrace's original roads, added 14 miles (23 km) of sidewalks, and begun work on a permanent water and sewer system.

[8] In 1955, the city annexed 150 acres (61 ha), bringing its population to over 5,400, opened its own post office, and established a police department with five full-time personnel.

[5] In 1958, the city government signed agreements with the sewer districts of Edmonds and Ronald (now part of Shoreline) to form a "Little Metro" and share treatment facilities.

[31] The city also placed restrictions on relocated homes from Seattle later that year, following a surge of those displaced from the construction of Interstate 5, a major regional freeway that would later reach Mountlake Terrace.

[32] In the early 1960s, a new industrial park was developed in Mountlake Terrace that attracted several companies, including electronics firm John Fluke Corporation, who moved 325 employees from Seattle in 1960.

[28][33] Several retailers and other small businesses opened at Mountlake Terrace's shopping centers, including a pair facing each other at the intersection of 232nd Street Southwest and 56th Avenue West.

[41] The city government had hoped to develop a standalone town center, but local businesses were unable to compete with the Alderwood Mall in Lynnwood, which opened in 1979 and drew away shoppers.

[7][46] The city government continued to encourage development of its industrial center on the northwest side of Interstate 5, including improvements to a freeway interchange and special zoning initiatives.

[46][47] The freeway project also included funding from the state government to improve city parks and sports fields as compensation for lost land at an elementary school in Melody Hill.

[48] A 18-acre (7.3 ha) site at the southwest corner of the original subdivision with 14 homes and several small business was proposed for a hotel and commercial development that was later put on hold because of planning complications.

[53] The city government opposed the construction of a strip club in the 1990s and debated a comprehensive rezoning of the town center to support traditional retail and commercial uses.

[5][54] Mountlake Terrace rebuilt its high school in 1991 and opened a variety of recreational facilities by the end of the decade, including an indoor ice-skating rink and a section of the multi-use Interurban Trail, alongside plans for two casinos.

[55][56][57] The city government began planning for a redeveloped town center in the early 2000s, passing zoning regulations to spur the construction of mixed-use residential and commercial.

The town center plan, which was adopted in 2007, allowed for building heights of up to seven stories, encouraged architectural variety, and required smaller setbacks from sidewalks.

[64][65] The light rail extension triggered an update to the town center in 2019 that would allow for building heights of 12 stories and encouraging walkable development with smaller blocks.

[66] A strip of land along Interstate 5 near the transit center, including the former Evergreen Elementary School, is being redeveloped into a three-building housing complex with 600 apartments and retail space that will open in stages from 2020 to 2026.

[69] The building was demolished in 2010 and funding for a new city hall at the site was approved by voters in 2017 as the centerpiece of a civic campus adjacent to Veterans Memorial Park.

[88] The city had 1,404 registered businesses with 6,993 total jobs, according to 2012 estimates by the U.S. Census and Puget Sound Regional Council, with most belonging to the professional services sector.

[91]: 14  The Town Center is home to several major retailers and restaurants, including the Diamond Knot Brewpub and Double DD Meats, among the oldest surviving businesses in the city.

[85][95] Several office parks and industrial buildings are located on the 220th Street Southwest corridor northwest of the Town Center, including the Premera headquarters and other healthcare employers.

[87] Mountlake Terrace provides its own municipal services, including animal control, building inspection, zoning, public works, parks and recreation, tap water, sewage treatment, and a police department.

[78]: 24 [125] The main community center in the Mountlake Terrace is the Recreation Pavilion, which opened on November 26, 1968, and includes several swimming pools, a lazy river, racquetball courts, and an indoor gymnasium.

[161] It is served by the 1 Line of Sound Transit's regional Link light rail system, which was extended to Lynnwood in August 2024 and connects Mountlake Terrace to the University District, Downtown Seattle, and Seattle–Tacoma International Airport.

[170] Sewage from Mountlake Terrace is primarily sent to the City of Edmonds for treatment and discharge into Puget Sound, with overflow treated at the regional Brightwater facility near Maltby by King County Metro.