There are many components that make up what you pay for your home. Along with price, the interest rate on your mortgage is an important consideration.
Currently, mortgage rates sit a little lower than they did last year. The average rate on a 30-year mortgage is 6.72%.
However, there hasn't been as much budge as prospective homebuyers would like. When the Federal Reserve cut interest rates three times by to end of 2024, mortgage rates didn't follow.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
They peaked above 7%. Why? While the Federal Reserve’s decisions can influence savings accounts and short-term lending rates, mortgage rates tend to follow the 10-year Treasury yield more closely.
What's the 10-year Treasury yield?
The 10-year Treasury yield is the government's borrowing cost for a decade. As such, the Treasury rate influences everything from corporate bonds to mortgage rates.
You can see the correlation between mortgage rates and the 10-year Treasury bond in the chart below:
Why are mortgage rates tied to the 10-year Treasury yield? Since mortgages last longer than shorter-term lending options tied to the federal funds rate, they require a benchmark, where the duration reflects the average mortgage.
This is why the 10-year Treasury yield comes in, because it lasts about as long as the average homeowner has a mortgage.
If you're in the market for a new mortgage, use the tool below from Bankrate to compare and find some of today's rates:
How does the Treasury yield impact mortgage rates?
Currently, the 10-year Treasury yield is 4.21%. This was a substantial drop of 14 basis points due to new tariffs being implemented and a less-than-stellar jobs report.
With this in mind, who influences the Treasury yield? It's investors' expectations on short-term interest rates.
When investors buy mortgage-backed securities, they're pledging money for a longer term than, say, a one-year Treasury bill since they're investing in a package of mortgage loans.
As such, more risk can come with longer-term investments.
It's why investors want a term premium to ensure they're making money on their investments. This premium influences the interest rate you'll pay on mortgages.
They use the following economic factors to guide their expectations:
- Monetary policies: When the Federal Reserve sets the federal funds rate, it's a benchmark for short-term rates. While it doesn't directly impact mortgage rates lenders assess, it can give investors an idea of future monetary policy, which they can use to influence investing decisions.
- Economic growth: When the economy does well, investors seek more promising opportunities such as equities. Meanwhile, when there's economic uncertainty as there is now, with more tariffs being implemented and slower job growth, investors look for safer investments, which Treasury bonds offer.
- Inflation: When inflation becomes higher, investors seek higher interest rates. It's the reason you see mortgage rates close to 7% currently, because there's uncertainty about how much the trade wars will impact inflation moving forward.
What's the mortgage spread?
On top of this, there's a mortgage spread. It's the difference between your mortgage rate and the 10-year Treasury yield. Traditionally, it's been from 0.71 points to 1.4 points, according to Fannie Mae.
The spread consists of two parts: The primary-secondary spread and the secondary spread. The primary-secondary spread factors in mortgage origination fees, other lender costs and profits.
Meanwhile, the secondary mortgage spread is the difference between the mortgage-backed security (MBS), which investors purchase, and the 10-year Treasury rate.
The secondary spread covers some risks investors might face.
To illustrate, an increased risk of prepayment can cause the spread to increase, since investors won't maximize returns if the mortgage ends prematurely.
This can happen when homeowners shop around and find a lower interest rate; they might be inclined to take advantage of it through refinancing.
The bottom line on 10-year Treasury yield
Mortgage interest rates are slightly lower, as the 10-year Treasury yield dropped.
As such, shopping for the best mortgage rate is one of the more effective ways to lower total loan cost. Doing so ensures you don't have to overpay on what could be the biggest investment you'll make.
Related content
-
The Y Rule of Retirement: Why Men Need to Plan DifferentlyIf you have a Y chromosome (because you're a guy), following the 'Y rule of retirement' can help you transition to this new life stage with grace.
-
Retire on This Island for Mediterranean Living on the CheapThis independent nation has a lower cost of living and more visa options than many of its Mediterranean cousins.
-
Retire on This Island for Mediterranean Living on the Cheap
This independent nation has a lower cost of living and more visa options than many of its Mediterranean cousins.
-
The Truth About the Dark Side of Rooftop Solar PanelsRampant bankruptcies in the solar panel industry have left many consumers with systems that don't work and no way to get them fixed. Worse, they're being hounded to keep paying despite not receiving what they were promised. What can they do?
-
Watch Out for These Travel Scams This SummerIdentity Theft These travel scams are easy to fall for and could wreck your summer. Take a moment to read up on the warning signs and simple ways to protect yourself.
-
Retire in the Canary Islands for Beaches and Natural BeautyRetirees enjoy Spain's Canary Islands, where life can be as hectic or as chill as you like. The one constant will be almost year-round mild weather.
-
Five Myths About Downsizing in RetirementRetirees might dream of selling their home, downsizing to a smaller one and investing the extra cash for income, but the profit they pocket is often less than what they wished.
-
Financial Fact vs Fiction: Why Inflation Is Lower, But Prices Are NotDo you think bonds protect you from stock losses? Are you confident your assets will go to your intended heirs if all you have is a will? Think again — and read on for other myths that could be leading you astray.
-
Corn Sweat: Combatting the Hidden Effects of Humidity This SummerHow to keep your home cool when even the corn is sweating this summer.
-
Retire in Ireland for Lush, Green Landscapes and Bustling CitiesWant to retire in Ireland? From visas and residency requirements to health care and taxes, here's what you need to know.
