Does the Fed Rate Influence Mortgage Rates?

If you follow news about the economy, you’ll hear a lot of talk about the Federal Reserve (a.k.a. the Fed) and its influence on borrowing costs. This is especially true if you are in the market for a new home or are thinking about refinancing. And while the Fed doesn’t directly set mortgage rates, its decisions may indirectly impact interest rates for home loans. But how exactly does that happen and what does it mean for you? Here’s a mini-lesson on how those rate changes could alter your home borrowing experience.

Why Does the Fed Change Rates?

The Federal Reserve controls the federal funds rate, which, according to the Fed, is “the interest rate charged by banks to borrow from each other overnight.” This rate helps regulate the economy by influencing borrowing, spending, and inflation. The Fed typically meets eight times a year to decide whether to raise, lower, or keep interest rates the same. Their goal is to adjust the Fed Funds Rate to balance job growth and stable prices, aiming to keep inflation low while helping people find jobs.

When inflation is high, the Fed raises rates to slow borrowing and spending.
When the economy is weak, the Fed lowers rates to encourage borrowing and boost economic activity.

Why Mortgage Rates Are Complicated (and Often Not Connected)

While mortgage rates aren’t set by the Fed, they often (but not always) move in the same direction as the federal funds rate. Here’s how the chain reaction works:

1. Banks Adjust Their Interest Rates.

When the Fed raises or lowers its rate, banks adjust the rates they charge on loans, including mortgages. A higher Fed rate makes short-term borrowing more expensive, while a lower rate makes it cheaper.

2. Mortgage Rates Move—But Not Necessarily in Tandem

Mortgage rates don’t move exactly in step with the Fed rate but generally trend in the same direction. However, since a mortgage is a long-term debt, its interest rates are influenced differently than car loans or personal loans. When determining mortgage rates, lenders and investors consider factors such as inflation, the 10-year Treasury yield, the demand for mortgage-backed securities, and overall economic conditions.

3. Fixed vs. Adjustable Mortgage rates

Fixed-Rate Mortgages: If you already have a fixed-rate mortgage, changes in the Fed rate won’t affect your interest rate. However, if you’re applying for a new mortgage, a higher Fed rate could mean higher borrowing costs.
Adjustable-Rate Mortgages (ARMs): If you have an ARM, your interest rate is likely tied to a financial index that moves with the Fed rate, meaning your monthly payments could increase or decrease over time. ARMs are far less common than fixed-rate mortgages in the U.S. (only about 5 to 10% of the market), but when interest rates are high, they become more popular.

Other Factors That Influence Mortgage Rates

While the Fed rate is important, mortgage rates also depend on:

The bond market. Mortgage rates are closely tied to the yield on 10-year Treasury bonds. When bond yields rise, mortgage rates usually go up, and vice versa.
The housing market. High demand for homes can lead to higher mortgage rates. So can rising construction costs caused by inflation, labor shortages, and supply chain issues. If construction costs are high, builders may build fewer homes, which stresses the demand for existing homes.
The economy. If the economy is strong, demand for homes increases, pushing rates higher. If there’s uncertainty or a recession, rates may drop.
Your financial health. Even if national rates go down, lenders look at your credit score, income, and debt to set your individual mortgage rate.

Why It Matters for You

Understanding how the Fed rate impacts mortgage rates can help you make better financial decisions. So, if you’re thinking about buying a home or refinancing in 2025 or 2026, pay attention to Fed announcements. Their decisions ripple through the economy and make a huge difference for banks and borrowers alike. A rate hike might mean higher costs for the average consumer, while a rate cut could lead to savings.

Hopeful home buyers can’t, of course, control the Fed’s decisions, but they can manage their credit scores and debt levels while they watch the story play out. They can create a financial plan to get the best mortgage rate possible in the current market.

If you are hoping to purchase a home or refinance one, keep an eye on interest rate trends and take a thoughtful approach. Staying informed can not only help you navigate the housing market and make smart choices but also save you a whole lot of cash.

Want more home buying tips?

Check out our mortgage glossary for all the terms you’ll need to know when buying your dream house.
Find out what a HELOC is (and how to use one).
Learn the basic steps you should take before selling your home.