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    Why Mortgage Rates Probably Won’t Drop After the Fed’s Rate Cut

    AnyFans Posted on

    By Joel O’leary

    Copyright fool

    Why Mortgage Rates Probably Won't Drop After the Fed's Rate Cut

    When the Fed cuts interest rates, most people assume mortgage rates will drop right afterwards. Makes sense, right?

    But that’s not exactly how it works. Mortgage rates typically move in conjunction with longer-term bonds, such as the 10-year Treasury yield. And since bond markets anticipate rate changes in advance, mortgage rates usually decline before official Fed rate cut announcements.

    So if you’re house hunting, don’t expect a golden rate to land in your lap overnight. Today’s rates already have the Fed cut factor kind of built in.

    Mortgage rates don’t mimic the Fed’s moves

    The Federal Reserve doesn’t set mortgage rates. What it actually adjusts is the federal funds rate — that’s the interest rate banks charge each other for overnight lending.

    That short-term rate impacts things like:

    Credit card APRsHome equity lines of credit (HELOCs)Savings products like certificates of deposit (CDs) and high-yield savings accounts (HYSAs)

    But mortgage rates — especially for 30-year fixed loans — march to a different drummer. They’re mostly influenced by the bond market, specifically the 10-year Treasury yield.

    So even if the Fed cuts rates, if bond yields stay elevated (or rise), mortgage rates can stay put or even climb.

    Curious how today’s mortgage rates compare? Explore the best mortgage lenders for first-time home buyers.

    Here’s what really drives mortgage rates

    Mortgage lenders price their rates based on what investors demand in the bond market.

    And one of the most important factors is inflation expectations.

    When inflation is high or sticky, investors want higher returns to offset it. That pushes Treasury yields higher, and mortgage rates usually follow.

    It’s a basic chain reaction:

    Inflation runs hot →Investors demand higher returns →10-year Treasury yield rises →Mortgage rates go up

    Of course, the reverse can also happen. When inflation cools, bond yields can fall and then mortgage rates often follow.

    The shift isn’t always immediate or clean. Investors typically wait for multiple months of consistent data before adjusting their expectations. Even then, outside forces like strong job numbers or global market stress can keep rates elevated longer than you’d think.

    So while a Fed rate cut may eventually help ease mortgage rates, it’s not the magic switch many buyers are hoping for.

    What home buyers should do now

    If you’re in the market for a home, the key is to stay flexible. Waiting for mortgage rates to plunge might leave you on the sidelines for longer than you expect.

    Here are some smart moves to stay in control:

    Always shop multiple lenders — Rates can vary quite a bit between banks and credit unions. Always shop around.Work on your credit score — A higher score can earn you a better rate, even if market averages are high.Consider points and closing costs — You can pay upfront to lower your rate long term, especially if you plan to stay in the home for years.Explore ARM options — Adjustable-rate mortgages start lower but adjust later. They might make sense if you’ll move before the adjustment period kicks in.

    And remember, you can always refinance later if rates improve drastically. Buying the right house at today’s rate might still beat renting or waiting while home prices rise.

    Want to compare top mortgage lenders and see today’s best rates? Check out our guide to the best mortgage lenders here.

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