Sep 27 2022

What causes mortgage rates to rise and fall?

Learn about the seven indicators that help to predict the ups and downs of mortgage rates.

Where are today's mortgage rates heading? 7 influencing factors

Let’s explore the indicators used to help predict the ups and downs of mortgage rates:

1. Federal Reserve benchmark interest rate

Mortgage rates have increased by more than 2 percent since the beginning of the 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 rates in the long-term.

If the Fed is able to successfully curb inflation, it’s also possible that mortgage rates may decrease.

2. 10-year Treasury rate

While there are no guarantees, the trajectory of the 10-year U.S. Treasury note is considered the most reliable indicator of where mortgage 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.

This is why, in recent months, the Treasury yield climbed related to concerns about the economy and inflation. Mortgage rates rose too.

3. Inflation

A mortgage interest rate reflects the cost of taking out a mortgage. When inflation is high, as it is now, borrowing costs increase. So, inflation may indirectly cause mortgage rates to rise. High inflation can decrease the buying power of the dollar, and usually, lenders must increase mortgage rates to compensate and cover the cost of borrowing.

Looking for ways to lower your rate? Ask us if a Seller-Paid Rate Buydown can help.

4. U.S. jobs report

Because mortgage 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 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. Given the Fed’s aggressive rate hikes and elevated inflation, some economists say a recession is possible. If a recession occurs, the Fed may have to lower its rate to stimulate the economy, and mortgage rates are likely to fall with it.

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 rates hit their lowest point in history. And though today’s rates are increasing as the housing market shifts back into a better state of balance, they’re still at historically low levels.

Rising rates have brought the market back closer to its norm, and homebuyer demand is moving toward pre-pandemic levels.

Are you looking for the lowest rate?

That’s understandable—a low interest rate is what most homebuyers want. But in actuality, a mortgage with a low rate isn’t always best. Choosing the wrong home loan has the potential to cost you, negating any amount you might save from securing a low rate. Contact a local Loan Officer to find out which affordable mortgage is right for you.

This is for informational and educational purposes only and not intended as an advertisement as defined by Regulation Z. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. MAC823-1482448.