09/23/2025
With all the talk about the FED lowering interest rates, here's what you should know:
Reductions to the Federal Funds Rate tend to lead to lower mortgage interest rates, but the relationship isn't direct or immediate. Here's how it works:
🔁 Understanding the Link: Federal Funds Rate → Mortgage Rates
The Federal Funds Rate is the interest rate at which banks lend to each other overnight. It's set by the Federal Reserve and influences a wide range of interest rates across the economy.
Here's how a reduction in the Fed Funds Rate affects mortgage rates:
1. 🏦 Cheaper Short-Term Borrowing for Banks
When the Fed lowers its rate, banks pay less to borrow money.
This reduces the cost of funds for banks, which can pass savings along to consumers via lower interest rates on various loans, including mortgages.
2. 💸 Lower Yields on Treasury Securities
Mortgage rates, especially 30-year fixed rates, are closely tied to the 10-year U.S. Treasury yield.
Lower Fed rates often cause Treasury yields to fall, as investors shift to longer-term securities for higher returns when short-term rates drop.
As 10-year Treasury yields go down, mortgage rates usually follow.
3. 📉 Economic Signals and Mortgage Rates
A rate cut usually signals that the Fed is concerned about slowing economic growth or low inflation.
In response, investors expect slower growth, which reduces demand for credit and drives down longer-term interest rates — including mortgage rates.
✅ Result: Mortgage Rates Tend to Decrease
While not perfectly correlated, here's the general pattern:
| Fed Funds Rate ↓ | → | 10-Year Treasury Yield ↓ | → | Mortgage Rates ↓ |
But the effect depends on:
Inflation expectations
Economic outlook
Global financial conditions
Mortgage-backed securities market
📌 Important Caveat
Not all types of mortgages are affected equally:
Type of Mortgage
Tied Closely To
Effect of Fed Rate Cut
Fixed-rate (e.g., 30-year)
10-year Treasury yield
Indirect, but significant
Adjustable-rate (ARM)
Fed Funds Rate or LIBOR/SOFR
More direct and immediate impact
Home equity lines (HELOCs)
Prime rate (based on Fed Funds Rate)
Strong direct impact
🧠 Summary
When the Fed lowers rates, mortgage rates tend to drop — making borrowing cheaper for homebuyers and potentially increasing demand in the housing market. However, this relationship is influenced by broader market forces and investor expectations. A Fed rate cut can lower mortgage rates indirectly by reducing Treasury yields—but mortgage rates also heavily depend on market sentiment, credit risk, and investor demand.
Source: Michael Chelst Branch Manager
NMLS # 189764 totalmortgage.com
