How Mortgage Rates Are Actually Set
The most common belief about mortgage rates — that they move directly with the Federal Reserve’s rate — is not quite right, and the misunderstanding costs people good decisions. Here is how rates are truly set.
Rates live in the bond market
Most mortgages are bundled and sold to investors as mortgage-backed securities. The yield investors demand for those securities — which tracks closely with the 10-year Treasury and the broader bond market — is the real driver of mortgage rates. When investors accept lower yields, mortgage rates fall; when they demand higher yields, rates rise.
What moves the bond market
- Inflation. The single biggest force. Higher inflation pushes yields and rates up, because investors demand to be paid more than inflation erodes.
- Federal Reserve policy. The Fed sets short-term rates and signals its intentions, which influences the bond market — but indirectly, and often not in the direction the headlines suggest.
- The economy. Strong growth and employment tend to push rates up; weakness tends to pull them down.
- Supply and demand for mortgage bonds and global flows of money seeking safety.
Do not try to out-trade the bond market. The forces that move rates are enormous and unpredictable even to professionals. Decide based on your life and your numbers; if rates improve later, you can refinance.