How the Federal Reserve Affects Mortgage Rates — and What It Means for Homebuyers in 2026

When the Federal Reserve Board met in December, it cut rates for the third time last year. After holding them at 4.25% to 4.50% for months, rates now stand at 3.50% to 3.75%.

While less than one percentage point might sound like a small change, the decision influences nearly every type of lending product, including mortgage rates, car loans and savings accounts.

The Federal Reserve, or Fed, is the central bank of the United States and regulates the country's financial system. The Fed's decisions could signal either economic growth or a potential downturn.

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One of the most critical discussions during each Federal Open Market Committee (FOMC) meeting is whether to raise, lower or hold interest rates. A rate increase often signals confidence in the economy — typically when unemployment is steady and growth is strong — and is used to cool inflation if prices are climbing too quickly.

On the other hand, lowering rates is a tool to stimulate the economy, making borrowing cheaper when growth is slowing or inflation is easing. With inflation not falling as fast as the Federal Reserve would like and growth showing signs of cooling, many experts expect the Fed to pause rate cuts at the January Fed meeting.

For most folks, Fed meetings might not seem to carry much weight. But the outcomes of these meetings — especially when it comes to interest rates — affect all people, especially those on the hunt to buy a home.

How the Federal Reserve affects mortgage rates

The Fed doesn't set mortgage rates or other consumer lending rates directly. However, when the central bank changes its benchmark interest rate, lenders and financial institutions often adjust their own rates in response.

For example, if the Fed raises interest rates, you might see a boost in your high-yield savings account's annual percentage yield (APY), meaning you'll earn more money on your savings. But it also means that if you need to take out a loan — such as a mortgage or auto loan — your interest rate could be higher than someone who borrowed earlier.

A drop in interest rates typically signals that the Fed wants to encourage consumer spending. The less you pay in interest, the more likely you are to borrow and spend. Lower interest rates indicate to potential buyers that, with strong credit, you could secure a better mortgage rate than someone who purchased a home when rates were higher.

However, one thing to know is that the 10-year Treasury yield has more influence on mortgage rates than the Fed's benchmark rate, which is why a Fed rate cut might not immediately lead to corresponding drops in offered mortgage rates. Even so, both play a role in shaping lender decisions to raise or lower interest rates.

Curious about where rates stand today? Explore and compare some of today's top mortgage products with the tool below, powered by Bankrate.

Mortgage rate trends in 2025: What homebuyers should know

As of January, the average rate for a 30-year fixed-rate mortgage was 6.06%, and 5.38% for a 15-year fixed-rate mortgage, according to Freddie Mac.

Last year, rates started to slowly drop, according to data from the Federal Reserve Bank of St. Louis. Between January and December 2025, the 30-year fixed-rate mortgage dropped from 6.91% to 6.15% — the lowest rate since September 2024, when rates dropped to 6.08%.

At the start of 2026, rates have beaten that September 2024 low but are still a long way from the sub-3% mortgages homebuyers were enjoying during the pandemic. We might never see the 2%-3% mortgage interest rates of the early years of the COVID-19 pandemic again. Current rates are roughly double the all-time lows from 2020 and 2021.

Prospective homebuyers are facing tough decisions about how to afford new homes. The median home sale price for the second quarter of 2025 was $410,800, according to the Federal Reserve Bank of St. Louis. That's a significant jump from the second quarter of 2020, when the median was $317,100 — an increase of nearly $100,000 in five years.

Home prices peaked at $442,600 in the fourth quarter of 2022 — the highest level on record — and have fluctuated since then.

Even as home prices have increased and interest rates have edged upward, the federal minimum wage remains $7.25 an hour — the rate it's been since 2009. While incomes have stagnated, the cost of living has risen, making it harder for would-be buyers to save for a home.

What happens to mortgages if the Fed raises rates?

If interest rates go up, it becomes more difficult to buy a home. It can also lead to longer wait times for homes already on the market to sell.

In December, the median time a home sat on the market was 73 days, according to the Federal Reserve Bank of St. Louis. That number has been steadily climbing since last spring.

Higher interest rates mean home affordability could decline, and homebuyers are less likely to refinance their current mortgages. Home prices might drop, which is good news for potential buyers but bad news for sellers looking to maximize profits.

However, a drop in home prices doesn't necessarily mean lower monthly payments. For example, consider a $417,000 home with a 10% down payment and a 6.8% interest rate. Now compare that with a $407,000 home with the same 10% down payment but a higher interest rate of 7.8%. Despite the lower purchase price, the higher interest rate leads to a larger monthly mortgage payment — $2,971 compared tp $2,788.

Even as the home price dropped, a slightly higher interest rate shows larger monthly mortgage payments than homes with a lower interest rate.

What happens to the housing market if the Fed holds or cuts rates?

If the Fed holds rates steady, mortgage costs are likely to remain where they are, keeping both buyers and sellers in a "wait and see" mode. If the Fed cuts rates, borrowing becomes cheaper.

That can encourage more homeowners to refinance or list their properties, and it often draws more buyers into the market. Increased demand can, in turn, push home prices higher.

Still, many prospective buyers track the Fed closely and might delay making an offer if they believe rates are about to drop. A widely anticipated rate cut can temporarily cool sales activity as shoppers wait for more favorable financing terms.

How homebuyers can prepare for the Fed's next move

Whether you're buying your first home, considering a refinance or simply watching the market, understanding how Federal Reserve policy affects interest rates can help you make informed financial decisions.

While mortgage rates remain elevated compared with pandemic-era lows, they’re still shifting in response to broader economic conditions. Keeping an eye on upcoming Fed meetings and economic indicators could give you a clearer picture of when the right time to act might be.

Related Content

• How Does the 10-Year Treasury Yield Affect Mortgage Rates?
• Fixed vs. Adjustable-Rate Mortgages: Which Is Better for Buying a Home?
• What to Watch for When Refinancing Your Home Mortgage
• 5 Ways to Shop for a Low Mortgage Rate