Understanding What Drives Mortgage Rates

Many people believe that the Federal Reserve directly controls mortgage rates, but that’s a common misconception.

The Federal Reserve’s Role

The Federal Reserve sets the Federal Funds Rate, which affects short-term lending rates like those for credit cards, auto loans, and Home Equity Lines of Credit (HELOCs). However, mortgage rates are influenced by different factors.

What Really Controls Mortgage Rates?

Mortgage rates are more closely tied to the bond market, especially the 10-year Treasury bond, which serves as a general indicator of market trends. However, the daily movement of mortgage rates is directly influenced by Mortgage-Backed Securities (MBS).

What Are Mortgage-Backed Securities?

Mortgage-Backed Securities are created by pooling together thousands of individual mortgages and selling them as a single investment. When demand for MBS is high, mortgage rates tend to fall. When demand is low, rates rise as investors seek higher returns.

What Does This Mean for You?

At Wain Capital, we monitor MBS and Treasury bonds to track rate changes. For consumers, keeping an eye on the 10-year Treasury bond is a good way to anticipate mortgage rate movements. Generally, when the 10-year yield rises, so do mortgage rates, and when it falls, mortgage rates usually follow.

In short, while the Federal Reserve influences the financial system, mortgage rates are primarily driven by the bond market, particularly through MBS and the 10-year Treasury bond.