How the Federal Reserve Influences Mortgage Rates (Without Setting Them Directly)

by How the Federal Reserve Influences Mortgage Rates

How the Federal Reserve Influences Mortgage Rates (Without Setting Them Directly)

If you’ve been keeping an eye on mortgage rates, you might have heard that the Federal Reserve (aka "the Fed") plays a big role in whether they go up or down. But here’s the thing—the Fed doesn’t actually set mortgage rates.

So, how does it affect them? While the Fed’s decisions don’t directly dictate mortgage rates, they influence the overall economy, which in turn impacts what lenders charge for home loans. Let’s break it down in a way that actually makes sense.

👉 Want to see the original article? Check it out here.

What Does the Federal Reserve Actually Do?

Think of the Federal Reserve as the economy’s traffic controller. It helps guide how much it costs to borrow money by setting something called the federal funds rate—the interest rate that banks charge each other for short-term loans.

While this rate directly affects things like credit cards and home equity loans, it also has a ripple effect on the overall financial system—including mortgages.

How Does the Fed’s Rate Impact Mortgage Rates?

Even though the Fed doesn’t decide mortgage rates directly, its policies influence them. Here’s how:

Fixed-Rate Mortgages (The Most Common Home Loans)
- These rates follow the 10-year Treasury yield (a government bond).
- When Treasury yields rise, mortgage rates usually go up. When they fall, mortgage rates tend to drop, too.
- The Fed’s actions influence Treasury yields, which is why their decisions can affect fixed-rate mortgages.
Adjustable-Rate Mortgages (ARMs)
- If you have an ARM, your rate can change over time, usually once a year.
- ARMs are tied to a rate called SOFR (Secured Overnight Financing Rate), which is directly impacted by Fed decisions.
- If the Fed raises rates, your mortgage payment could increase at your next adjustment period.

Where Are Mortgage Rates Now?

In 2022 and 2023, the Fed raised interest rates aggressively to slow down inflation, making it more expensive to borrow money. Then, at the end of 2024, they started cutting rates, lowering them three times in a row.

At their latest meeting in January 2025, the Fed decided not to cut rates again just yet. Even with these cuts, mortgage rates are still sitting above 7%, making homebuying more expensive than many would like.

Mortgage rates shift based on several factors, including:

Inflation – If inflation rises, mortgage rates tend to go up.
Supply & Demand – If lenders have too many borrowers, they may raise rates to slow things down.
Investor Interest – Mortgage rates also depend on how much investors want to buy mortgage-backed securities.

How to Get the Best Mortgage Rate (No Matter What the Fed Does)

Even though you can’t control the Fed, you can control what kind of mortgage rate you qualify for. Here’s how to improve your chances of getting a lower rate:

✔ Boost Your Credit Score – Higher credit = better loan terms.
✔ Lower Your Debt – Lenders like borrowers with manageable debt loads.
✔ Save for a Bigger Down Payment – The more you put down, the better your rate.
✔ Compare Lenders – Don’t just look at interest rates; check the APR, which includes fees and closing costs.

The Takeaway

While the Federal Reserve doesn’t set mortgage rates, its decisions shape the economy in ways that affect home loans.

Fixed-rate mortgages follow 10-year Treasury yields, which are impacted by Fed actions.
Adjustable-rate mortgages respond more directly to Fed rate changes.
Other factors, like inflation, investor demand, and lender supply, also influence mortgage rates.

If you’re planning to buy a home, focus on what you can control—your credit, debt, and loan shopping—so you can lock in the best rate possible.

👉 Want more details? Read the original article here: Bankrate: How the Fed Affects Mortgage Rates.

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