If you're in the market to buy a home, you've likely been closely following mortgage rates. They hit record lows in recent years, spiked significantly, and gradually decreased. Have you ever wondered why?

The answer is not simple, as various factors can influence mortgage rates. Here, we will discuss a few of the significant factors at play.

Inflation and the Federal Reserve

The Federal Reserve (Fed) does not directly determine mortgage rates. However, it does adjust the Federal Funds Rate in response to changes in inflation, the economy, employment rates, and other factors. Accordingly, mortgage rates tend to react. Business Insider explains:

"The Federal Reserve controls inflation by raising the federal funds rate, which can indirectly affect mortgage rates. If there is high inflation and investors expect the Fed to raise rates further, mortgage rates can increase. Conversely, if investors anticipate rate cuts and inflation is slowing down, mortgage rates typically trend downward."

In the past couple of years, the Fed raised the Federal Funds Rate to combat inflation, resulting in an increase in mortgage rates. Fortunately, experts predict that inflation and mortgage rates will become more favorable this year. Danielle Hale, Chief Economist at Realtor.com, states:

"Mortgage rates are expected to continue easing in 2024 as inflation improves . . ."

There are even discussions about the Fed potentially reducing the Fed Funds Rate this year due to cooling inflation, even though it has not yet reached its optimal target.

The 10-Year Treasury Yield

Moreover, mortgage companies assess the 10-year Treasury Yield to determine the interest rates on home loans. When the yield rises, mortgage rates tend to follow suit, and vice versa. According to Investopedia:

"Mortgage lenders often use the 10-year Treasury bond yield as a benchmark for their interest rates."

Typically, the spread between the 10-year Treasury Yield and the 30-year fixed mortgage rate has historically remained relatively consistent, but this is not the case. This suggests that there is room for mortgage rates to decrease. Therefore, monitoring the direction in which the treasury yield moves can provide experts with insights into the potential future trends of mortgage rates.

BOTTOM LINE

As the Fed is scheduled to meet later this week, industry experts will closely observe the decisions made and their impact on the economy. Having a team of professionals is advisable to navigate any changes in mortgage rates and their influence on your moving plans.