Images by GettyImages; Illustration by Hunter Newton/Bankrate
The Federal Reserve doesn’t set mortgage rates outright. But its decisions in setting interest rates do play a role in the percentages lenders offer would-be homeowners. And even if the Fed keeps things unchanged, mortgage rates can still fluctuate.
So, overall, how do the Fed’s monetary-policy moves affect mortgages — and influence the cost of borrowing to buy that dream home? Here’s how it all works.
What the Federal Reserve does
The U.S. Federal Reserve sets borrowing costs for shorter-term loans by changing its federal funds rate. This rate dictates how much banks pay each other in interest to borrow funds from their reserves, kept at the Fed on an overnight basis.
In 2022 and 2023, the Fed increased this key interest rate to help calm inflation — hikes that made it more costly for Americans to borrow money or take out credit.
Fixed-rate mortgages — the most popular type of home loan — don’t mirror the federal funds rate, however; they track the 10-year Treasury yield (more on that below). The fed funds rate does affect short-term loans, such as credit card rates and the rates on new home equity loans and lines of credit.
The Fed also buys and sells debt securities in the financial marketplace. This helps support the flow of credit, which tends to have an overarching impact on mortgage rates.
The Fed’s latest meeting
After 11 rate hikes from early 2022 through mid-2023, the Fed announced — for the eighth straight time — a continued pause at its latest meeting on Wednesday, July 31. That means the federal fund rate remains in a range of 5.25-5.5 percent.“Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the [Federal Open Market] Committee’s 2 percent inflation objective,” the Fed said in a statement.
While earlier this year the Fed had indicated it planned to cut rates in 2024, an actual reduction keeps getting pushed farther into the future. “Much like that flight where departure keeps getting delayed 15 minutes at a time with no end in sight, the timetable for when the Fed begins to cut rates is equally uncertain,” says Greg McBride, CFA, Bankrate chief financial analyst.
However, at this meeting the central bank did hint that it’s getting closer to a long-awaited reduction in rates, perhaps as soon as September (when the Committee next gathers). To extend the airline analogy: The plane is at the gate, and the flight crew is about to board.
Factors that influence mortgage rates
Fixed-rate mortgages are tied to the 10-year Treasury yield. When that goes up or down, fixed-rate mortgage rates follow suit.
The fixed mortgage rate isn’t exactly the same as the 10-year yield, however; there’s a gap between the two.
Typically, the gap between the 10-year Treasury yield and the 30-year fixed mortgage rate spans 1.5 to 2 percentage points. For much of 2023 and 2024, that margin grew to 3 percentage points, making mortgages more expensive.
Mortgage rates also move due to:
- Inflation: Generally, when inflation picks up, so do fixed interest rates.
- Supply and demand: When mortgage lenders have too much business, they raise rates to decrease demand. When business is light, they tend to cut rates to attract more customers.
- The secondary mortgage market, where investors buy mortgage-backed securities: Most lenders bundle the mortgages they underwrite and sell them in the secondary marketplace to investors. When investor demand is high, mortgage rates trend a little lower. When investors aren’t buying, rates might rise to attract them.
How the Fed affects adjustable rate mortgages (ARMs)
While fixed-rate mortgages dominate the U.S. residential financing scene, some Americans prefer adjustable rate mortgages (ARMs), which have variable interest rates that reset annually or semi-annually. The Fed’s moves can affect them more directly.
More specifically, the rates on ARMs are often tied to the Secured Overnight Financing Rate, or SOFR. Because the Fed’s rate decisions serve as a basis for savings instruments, raising or lowering the fed funds rate can push the SOFR up or down. ARM rates, in turn, go up or down as well when the rate resets.
All this means that, if the fed funds rate goes up, your ARM rate will increase as well at the next adjustment.
What to consider if you’re getting a mortgage
Regardless of current Federal Reserve policy, your best bets for the lowest possible mortgage rate are to maintain solid credit, keep your debt low, make as much of a down payment as you can and shop around for loan offers.
When comparing rates, take a look at the APR, not just the interest rate — some lenders might advertise low interest rates, but offset them with high fees. You’ll know your true all-in cost, including these fees, by understanding the APR.
Bottom line on how the Fed affects mortgage rates
The Federal Reserve doesn’t determine fixed mortgage rates. But its policy decisions weave into the broader economic picture that informs and influences your borrowing costs. When setting fixed rates, mortgage lenders take the Fed’s moves into account, as well as factors like the 10-year Treasury yield, inflation and investor appetite. And the Fed’s changes to its benchmark borrowing rates will impact the indexes that influence ARM rates as well.
FAQs
The Fed also influences mortgage rates, but doesn't set them. Instead, mortgage rates are affected by things like inflation, job growth, a shrinking or growing economy and more. The Federal Reserve's monetary policy is also a factor.
How mortgage rates are moving? ›
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down. What is the lowest mortgage rate right now?
How does the Fed decide to change interest rates? ›
The Fed sets a “target” rate
Eight times a year, the Federal Open Market Committee (FOMC) — a group of people from the Fed in charge of setting monetary policy — gets together to decide what the ideal federal funds rate should be, based on how healthy the economy is (more on this in a minute).
Should I lock my mortgage rate today? ›
While mortgage rates could fall in 2024, it's not a given. If you're risk-averse and want to avoid any chance of your mortgage rate increasing, locking in your mortgage rate today may be the best option. But if you think rates will drop before you make an offer, choosing not to have a rate lock could make more sense.
Can the Fed affect real interest rates? ›
The Fed can shock rationally expected real interest rates, but only by taking policy actions other than the actions the public supposes they are taking. That is, if Fed policy on a particular day is known by the public on that day, it will have no effect on real rates.
What are the effects of the Fed interest rate decision? ›
In other words, when the Fed's rate goes up (or down), those interest rates move in lockstep — a domino effect on broader consumer loan products. Another factor making it more expensive to borrow: the availability of money in the financial system also tends to shrink when interest rates are higher.
What will the mortgage rate be in July 2024? ›
Current mortgage rates as of July 31, 2024
| 30-year conforming | |
|---|
| Current Rate | 6.551% |
| Rate Last Reported | 6.756% |
| 30-year FHA | |
| Current Rate | 5.962% |
13 more rowsJul 31, 2024
How will you afford the increase in monthly mortgage payments? If you have a $300,000 mortgage, a one percent increase in interest rates costs you $175 per month more on your mortgage. If your rate goes up two percent, then your mortgage payment is $350 higher.
What is today's current interest rate? ›
Current mortgage and refinance interest rates
| Product | Interest Rate | APR |
|---|
| 20-Year Fixed Rate | 6.17% | 6.22% |
| 15-Year Fixed Rate | 5.59% | 5.67% |
| 10-Year Fixed Rate | 5.87% | 5.95% |
| 5-1 ARM | 5.85% | 7.03% |
5 more rowsWith profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.
The Federal Reserve is one of many influences on mortgage rates, along with inflation and economic growth.
How does the Fed change interest rates on loans? ›
When the Federal reserve lowers the federal funds rate, banks pay less to borrow money from one another. Banks, in turn, lower interest rates on loans (including mortgages) and credit cards, lowering the cost of borrowing money to buy cars, homes and other big purchases.
What if rates drop after I lock? ›
When you lock the interest rate, you're protected from rate increases due to market conditions. If rates go down prior to your loan closing and you want to take advantage of a lower rate, you may be able to pay a fee and relock at the lower interest rate. This is called “repricing” your loan.
What is the lowest mortgage rate in history? ›
The lowest average mortgage rates on record came about when the Federal Reserve lowered the federal funds rate in 2020 and 2021 in response to the pandemic. As a result, the weekly average 30-year, fixed-rate mortgage fell to 2.65%, while the average 15-year, fixed-rate mortgage sunk to 2.10%.
What is a good mortgage rate for 30-year fixed? ›
30-year mortgage rates are interest rates offered on home loans with 30-year repayment terms. Today's rates for 30-year fixed-rate mortgages are in the upper 6% to low 7% range for buyers with excellent credit.
Do mortgage rates go down when the Fed cuts rates? ›
If the Fed were to cut rates more than expected, that could push mortgage rates down further. But if the Fed sticks to the most likely plan and enacts a smaller cut, it's possible that mortgage rates won't move.
How does the Fed affect interest rates and the demand for housing? ›
One of the most immediate effects of a Fed rate cut is the potential for lower mortgage rates. For prospective homebuyers, this can mean lower monthly payments or the ability to buy a more expensive home than they otherwise could.
Will the Fed lower rates in September? ›
The Federal Reserve is widely expected to lower interest rates at its next meeting on September 17 and September 18. The federal funds rate currently stands at a 5.25% to 5.50% range, and there are expectations that the Fed will reduce the rate by 25 basis points.
Will interest rates come down? ›
When will mortgage rates come down? Following the August base rate cut, mortgage rates on fixed rate mortgages have been falling as lenders slashed rates. Many experts are predicting one further base rate cut in 2024 and for interest rates to fall to around 4% by the end of next year.
