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Understanding Key Factors Influencing Mortgage Rates

Are you on the hunt for a new home? Then, you're likely keeping a sharp eye on mortgage rates. They've been a rollercoaster lately, haven't they? First hitting record lows, then skyrocketing, and now they're easing back again. But why do these rates change so much?

It's a bit complex, but let's break down two major factors that significantly sway mortgage rates.

Inflation and the Federal Reserve's Role

The Federal Reserve, commonly known as the Fed, plays a big part, though not directly setting mortgage rates. What they do is adjust the Federal Funds Rate based on inflation, economic health, and employment figures. These adjustments then influence mortgage rates. As Business Insider puts it:

“The Federal Reserve slows inflation by raising the federal funds rate, which can indirectly impact mortgages. High inflation and investor expectations of more Fed rate hikes can push mortgage rates up. If investors believe the Fed may cut rates and inflation is decelerating, mortgage rates will typically trend down.”

In recent years, the Fed has upped the Federal Fund Rate to combat inflation, which in turn caused a spike in mortgage rates. However, experts like Danielle Hale from Realtor.com suggest a positive change:

“[M]ortgage rates will continue to ease in 2024 as inflation improves . . .”

There's even buzz about the Fed possibly cutting the Fed Funds Rate this year, considering inflation is showing signs of cooling.

The Influence of the 10-Year Treasury Yield

Mortgage lenders often turn to the 10-Year Treasury Yield when deciding interest rates for home loans. If this yield climbs, mortgage rates typically rise alongside it. And the reverse is true too. Investopedia notes:

“One frequently used government bond benchmark to which mortgage lenders often peg their interest rates is the 10-year Treasury bond yield.”

While historically, the gap between the 10-Year Treasury Yield and the 30-year fixed mortgage rate has been stable, it's been a bit unpredictable lately. This irregularity suggests that mortgage rates might have some room to decrease. So, by watching the treasury yield trends, experts can predict where mortgage rates might head.

Bottom Line

With the Fed meeting coming up, industry professionals are eagerly watching to see their decisions and the consequent effects on the economy. When dealing with shifts in mortgage rates and how they impact your plans to move, it's wise to have a skilled team like ours at your side.

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