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 at the lowest they have been in one year. The average rate on a 30-year mortgage is 6.39%.
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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?
Recently, the 10-year Treasury yield dropped to 4.04%. And when this yield drops, so can the costs of borrowing, specifically with mortgages.
With this in mind, who mainly 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 earning a return 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. And if investors lose confidence in the Fed, they might require higher returns, which could raise mortgage rates.
- 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 at their lowest level in a year. This means now is an excellent time to secure a mortgage if you're in the market to buy a home.
Related content
-
How Location Changes the Math on Owning a Vacation HomeThe market you choose can make your dream getaway a smart investment — or an expensive mistake.
-
You're High-Net-Worth: Should Your Retirement Savings Be in a Swiss Bank?Swiss banks have long been a haven for the wealthy. Here's how to safeguard your retirement account in a Swiss bank — and whether you should.
-
How Location Changes the Math on Owning a Vacation Home
The market you choose can make your dream getaway a smart investment — or an expensive mistake.
-
Where the Ultra-Rich Are Buying Real Estate NowWhy the ultra-rich are flocking to new corners of the world — and what their moves reveal about real estate hot spots.
-
Dealing With a Bad HOA Board? This Book Could Be Your Battle Plan'Bad HOA' by Luke Carlson empowers homeowners to push back against unfairness, offering advice on dealing with challenging homeowners associations (HOAs).
-
Home Equity in Retirement: Should You Sell, Borrow or Rent?Learn how to preserve your property's value, tap equity for income and make smart choices about downsizing, renting or leaving a legacy.
-
I'm 63 With an Aging House That Needs Repairs, but I Might Move to a Retirement Community In a Few Years. Is It Worth Making Those Fixes?We ask financial experts for advice.
-
Falling Interest Rates: What They Mean for Homeowners, Savers and InvestorsAs interest rates fall, homeowners may celebrate while savers feel the pinch. Here’s what the change could mean for your money.
-
Refinance Applications Surge as Mortgage Rates TumbleThe window to refinance is reopening as mortgage rates hit their lowest level in nearly a year. Here’s what the market shift means for homeowners.
-
Cash vs. Mortgage: How to Pay for Your Second HomeShould you buy your second home outright or finance it with a loan? Weigh the pros, cons and tax implications before making the leap.
