Sep 15 2023

What causes mortgage rates to rise and fall?


If only there was a magic formula that could tell us exactly where mortgage rates are heading.

Where are mortgage rates heading? 7 influencing factors

So far, no one’s come up with a formula that can accurately predict mortgage rates. Until then, we can learn what to expect by looking at common indicators:

1. Federal Reserve benchmark interest rate.

Mortgage interest rates have increased in the past year. Some of this has to do with the Federal Reserve hiking its benchmark rate to help control inflation. Though a Fed rate hike impacts mortgage rates indirectly—and can even lead to a temporary drop if lenders are already prepared for a Fed rate increase—it typically contributes to higher mortgage interest rates in the long-term.

If the Fed is able to keep inflation down, it’s possible that mortgage rates may start to decline.

2. 10-year Treasury rate.

Historically, the trajectory of the 10-year U.S. Treasury note has been considered the most reliable indicator of where mortgage interest rates may be heading. The long-term mortgage rate has moved in sync with the 10-year Treasury rate for nearly 50 years. Economic variables, like inflation, interest rates, and growth or recession, can impact the Treasury yield.

But lately, the gap between fixed rates and the Treasury yield has widened due to economic uncertainty. Mortgage interest rates may decrease some, but the gap is likely to stay in this wider range.

3. Inflation.

A mortgage interest rate reflects the cost of taking out a mortgage. When inflation is high, borrowing costs—as well as mortgage rates—tend to rise. High inflation can decrease the buying power of the dollar, and usually, lenders must increase mortgage rates to cover the cost of borrowing and compensate. Conversely, lower levels of inflation may help to bring down mortgage interest rates.

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4. U.S. jobs report.

Because mortgage interest rates are influenced by economic factors, the monthly jobs report, released by the U.S. Bureau of Labor Statistics (BLS), has potential to drive rates higher or lower. Simply put, a good report can signify a stronger economy and may increase rates. A less-than-favorable report can indicate an economic slowdown and may decrease rates.

5. Recession.

Mortgage interest rates typically drop in times of economic recession. When economic growth declines for more than a few months, spending also slows, and companies may lay off workers. Following a cycle of aggressive rate hikes, some economists believe a recession is likely. If a recession occurs, the Fed may have to lower its rate to stimulate the economy, and mortgage interest rates could fall.

6. Housing market demand.

When homebuyer demand cools, lenders often adapt by lowering rates. This is so they can keep attracting borrowers. When demand is high, lenders may charge more and increase rates to make up for the added costs needed to sustain a higher sales volume. Fluctuations in rates can also be regional. Meaning, rates may be higher in a city where the market remains hotter, and the opposite can also be true.

7. Post-pandemic.

The housing market we saw throughout the pandemic—marked by ultra-low rates and booming demand—was unprecedented. It also wasn’t expected to last. In 2020, mortgage interest rates hit their lowest point in history. And though today’s rates have increased as the housing market shifts into a “new normal,” they’re still below the historical average.

Most homebuyers are—understandably—looking for a low rate.

But it may surprise you to hear that the loan with the lowest rate isn’t always the best option. In fact, getting into the wrong mortgage could potentially cost you thousands, wiping out any savings from a low interest rate. To find the right loan at the right price for you, request a personalized assessment.

Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. Not all applicants will qualify. MAC824-1488036.