2 of the Factors That Influence Mortgage Rates

If you are looking to buy a home, you have most likely been paying close attention to mortgage rates. They have hit record lows in recent years, risen dramatically, and are now falling back down slightly. Ever wonder why?

The answer is complicated because there’s a lot that can influence mortgage rates. Here are just a few of the most impactful factors at play.

Inflation and the Federal Reserve

The Federal Reserve (Fed) doesn’t directly determine mortgage rates. But the Fed does move the Federal Funds Rate up or down in response to what’s happening with inflation, the economy, employment rates, and more. As that happens, mortgage rates tend to respond. Business Insider explains:

“The Federal Reserve slows inflation by raising the federal funds rate, which can indirectly impact mortgages. High inflation and investor expectations of more Fed rate hikes can push mortgage rates up. If investors believe the Fed may cut rates and inflation is decelerating, mortgage rates will typically trend down.”

Over the last couple of years, the Fed raised the Federal Fund Rate to try to fight inflation, and as that happened, mortgage rates jumped up too. Fortunately, the expert outlook for inflation and mortgage rates is that both should become more favorable over the course of the year. As Danielle Hale, Chief Economist at Realtor.com, says:

“[M]ortgage rates will continue to ease in 2024 as inflation improves . . .”

There is even talk that the Fed may cut the Fed Funds Rate this year because inflation is slowing, despite the fact that it is still not back to their ideal target.

The 10-Year Treasury Yield

Additionally, mortgage companies use the 10-Year Treasury Yield to determine how much interest to charge on home loans. Mortgage rates typically rise as the yield rises. The opposite is also true. According to Investopedia:

“One frequently used government bond benchmark to which mortgage lenders often peg their interest rates is the 10-year Treasury bond yield.”

Historically, the spread between the 10-year Treasury yield and the 30-year fixed mortgage rate has been fairly consistent, but this has not been the case lately. That means there is room for mortgage rates to fall. Keeping an eye on how the treasury yield is trending can help experts predict where mortgage rates will go next.

Bottom Line

With the Fed meeting later this week, industry experts will be watching closely to see what they decide and how it affects the economy. A team of professionals can help you navigate any mortgage rate changes and their impact on your moving plans.

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