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
-
$40,000 CD vs $40,000 High-Yield Savings Account - 3 Things Savers Should Consider NowBoth options offer risk-free methods to grow your savings. Learn how much you can earn with each, how they differ and which one suits you best.
-
I'm 51 and my portfolio is up. I'm planning to retire at 60 and want to start moving out of stocks. Is that smart?We ask financial experts for advice.
-
I'm a Real Estate Investing Expert: Optional 721 UPREIT DSTs Can Be the Best of Both WorldsBefore investing in any 721 UPREIT exchange, look for one that offers a straightforward, investor-friendly exit.
-
I'm a Real Estate Investing Pro: This Is What Investors Should Know About Truck Stop InvestmentsTruck stops might seem like good investments, but they can actually be a risky gamble due to unstable fuel prices, unreliable operators and coming changes in transportation. Instead, consider safer options like industrial or residential properties.
-
I'm 57 With $4.1 Million and Plan to Retire Abroad in a Few Years. Can I Stop Contributing to My 401(k)?We ask financial experts for advice.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
Can You Afford a Million-Dollar Home on a $250,000 Salary?It’s more than the sticker price — mortgage rates, down payments, taxes and debt all factor into whether a million-dollar home fits your budget.
-
Why a Landmark Real Estate Commission Settlement Hasn’t Lowered Costs for HomebuyersThe 2024 NAR settlement promised commission transparency and negotiation —but one year later, average fees remain unchanged. See why change has been slow and what it means for homebuyers and sellers.
-
I'm 65 and My Property Taxes and Insurance Keep Going Up. How Can I Afford My House in Five Years?The costs of homeownership may continue to rise in retirement. Here's how to manage that.
-
The Risks of Forced DST-to-UPREIT Conversions, From a Real Estate ExpertSome new Delaware statutory trust offerings are forcing investors into 721 UPREIT conversions at the end of the hold period, raising concerns about loss of control, limited liquidity, opaque valuations and unexpected tax liabilities.
