How Does the Fed Rate Affect Mortgage Rates?

Nervous buyer surrounded by heads telling her mortgage rates are going up and she needs to buy now

Has a broker, lender or talking head on TV told you to buy an apartment now because interest rates are going up? If so, you need to tell them they’re in the wrong business – they could make billions of dollars with that information!

Mortgage rates are very important for homebuyers and the overall housing market but the interest rates everyone talks about? Not so much. How could rising interest rates not increase your mortgage rate? Let’s find out.

Table of Contents:

Which Interest Rates Are Going Up Anyway?
Why Doesn't A Rising Fed Funds Rate Matter To Buyers?
Why Doesn’t The Fed Funds Rate Impact Mortgage Rates?
So What Does Cause Mortgage Rates To Change?
How Should Interest Rates Affect Your Home Buying Process?

Which Interest Rates Are Going Up Anyway?

When you hear about interest rates on the news, it’s almost always referring to the “fed funds rate.” That's the interest rate banks receive on money held at the Federal Reserve (“the Fed”). You can think of it as the interest rate banks get on their savings account.

The fed funds rate is the Fed’s primary tool for implementing monetary policy. By raising interest rates, the Fed makes it more attractive for banks to save their money, leaving less available to make loans. Fewer loans means less spending and the overall economy slows.

In other words, when the Fed raises interest rates, they slow down the economy. When they lower interest rates, they speed it up.

Housing is the perfect real world example - if you were offered a mortgage with a 0% interest rate, you would be more likely to buy. In the process, you'd hire an buyer's agent, get a mortgage, pay movers, buy furniture, etc, all of which stimulate the economy.

So if the Fed is raising interest rates, isn’t that bad for buyers? Won’t mortgage rates go up? Not exactly.

Why Doesn't A Rising Fed Funds Rate Matter To Buyers?

Remember the Fed is raising the “fed funds rate.” Did we say anything about mortgage rates? Nope.

This is where most people go wrong.

Mortgage rates track the 10 Year US Treasury, not the fed funds rate. The 10 Year US Treasury is the interest rate the US government pays to borrow money for ten years. Look at this chart of mortgage rates in blue and the 10 Year Treasury in purple since 2014 -

Chart comparing the 30 year fixed mortgage rate and the 10 year US treasury rate

Pretty similar, right?

Now what about the fed funds rate? How does that compare to mortgage rates? Here’s the same chart but with the fed funds rate in purple -

Chart comparing the 30 year fixed mortgage rate and the fed funds rate

Not exactly a strong correlation. This is best represented by the period from 2014 to 2018 where mortgage rates were down while the fed funds rate went straight up.

Below is a chart that shows the difference or "spread" between mortgage rates and both the 10 Year US Treasury and fed funds rate.

Line chart showing spreads between the 30 year fixed rate mortgage and both the 10 year US treasury and fed funds rate

You'll see with the exception of 2020 (more on that on our dedicated COVID post), the difference between the 30 year fixed rate mortgage and Treasuries was pretty steady at ~1.75%. There is a very tight correlation because one tracks the other. If you know Treasury rates, you can add 1.75% and be pretty sure that's where mortgage rates are.

Meanwhile the fed funds rate spread bounced between 0.5% and 3%. There is virtually no correlation or connection between the two.

If this is already getting too in the weeds, your main takeaway should be that the interest rates you hear on the news have very little impact on mortgage rates.

Why Doesn’t The Fed Funds Rate Impact Mortgage Rates?

When you take out a mortgage, you’re borrowing money today, a year from now, two years from now and all they way out to 30 years from now.

At the same time, your bank is lending you money for 30 years and needs to consider what else it could do with that money over those 30 years so they consider today's interest rates and those in the future. If rates are going up, they're not going to lend money for 30 years at today's rate. They would lend at the average rate over that period.

Consider this analogy:

I’m willing to give you $1 this year, $2 next year, all the way out to $10 ten years from now. If I offered you $10 instead, would you take it? Of course not. You’d get $55 over those ten years.

A 10 Year Treasury does the same thing with interest rates. It takes everyone’s expectations for interest rates today, next year, up to ten years from now and figures out what that is worth today.

A rising fed funds rate only matters to mortgage rates if it's a surprise. Think about it:

  1. Everyone agrees - the Fed is going to raise interest rates (the fed funds rate).
  2. Since everyone agrees, the increase is already included in everyone’s 10 Year Treasury forecasts.
  3. Mortgage rates mirror the 10 Year Treasury so the increase is already included in mortgage rates as well.

So What Does Cause Mortgage Rates To Change?

One word - expectations.

When everyone starts to think the Fed won’t raise their interest as quickly or aggressively as they previously expected, interest rates go down.

In the example above, what would happen if instead of your payment going up $1 each year, the payments now only went up $0.50 each year? Even though the payments are still going up, you would be disappointed and willing to sell that future income stream for less. The same thing happens with interest rates - if they're going up but not as fast as previously expected, today's rates go down.

This is why the Fed often increases interest rates and 10 Year Treasury rates (and therefore mortgage rates) go down. In fact, since the market is never exactly right, interest rates are as likely to go down as up when the Fed increases interest rates.

How Should Interest Rates Affect Your Home Buying Process?

There are two points when buyers typically think about interest rates - when they’re thinking about buying in general and when they can lock in an interest rate.

For all of the reasons above, do not let anyone tell you to buy now because interest rates are going up.

However, locking in a rate can be a good idea as it eliminates interest rate risk. Provided you have enough time to close, a rate lock allows you to know exactly what your mortgage payment will be.

This is a lot of technical information so if it went over your head, don’t worry about it! Email us at and we’re happy to answer any questions you have. Yoreevo’s goal is to make home buying easy and transparent while also saving our clients a lot of money with our commission rebates!

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