What Financial Environmental Factors Affect Mortgage Rates?


The Fed Funds rate, the Prime Rate, and the 10-Year Treasury Bond Yield are widely publicized rate indicators that play a role in the overall mortgage rate environment. Prospective homebuyers can follow these indicators for an understanding of mortgage rate levels and activity.

Fed Funds Rate

The Federal Reserve System, often referred to as “the Fed” and “the central bank,” doesn’t directly set mortgage rates, but its monetary policy and establishment of the federal funds rate (known as fed funds) have a significant effect on the interest rates available to borrowers. Federal Reserve monetary policy acts to adjust the money supply upward or downward as needed to promote maximum employment, stabilize prices, and provide moderation of long-term interest rates in the U.S. economy.

The fed funds rate set by Federal Open Market Committee of the Federal Reserve affects how much banks charge each other for short-term loans and influences how much banks are willing to pay in interest on other financial products.

Generally, when the Fed increases the money supply, rates tend to experience downward pressure and when the money supply is tightened, rates tend to be pushed upward.

Prime Rate

The prime rate is an interest rate determined by individual banks and is used as a base rate for many types of loans. Many banks set their prime rate based partly on the target level of the federal funds rates set by the Federal Reserve. Prime rate is usually about 3% higher than the current fed funds rate and affects the interest rates for loans, mortgages, and credit cards, as well as the level of funds available (liquidity) in the financial markets.

When the prime rate is low, loans are less expensive, and funds are more available. When the prime rate increases, rates on loans and adjustable-rate credit cards can also increase.

10-Year Treasury Bond Yield

The 10-Year Treasury bond yield helps to show market trends. The 10-Year Treasury bond yield and 30-year fixed mortgage rates tend to move together as fixed-income investors compare returns available on the two types of securities. When the bond yield rises, mortgage rates typically rise, and when the bond yield drops, mortgage rates tend to drop. Historically, rates for a 30-year mortgage range between 1.70 percent and 2.0 percent above 10-year Treasury bond yields.

When the yields on less risky, government-backed Treasury bonds rise, investors in mortgage-backed securities demand higher rates as compensation for the greater risk associated with investing in mortgage instruments, which are not backed by the government.

Whatever the economic environment is, lenders set their own mortgage rates based on the overall rate environment along with other factors that may be specific to the financial institution.

For information about mortgage programs offered by Enterprise Bank, visit https://www.enterprisebanking.com/personal/loans/mortgage or contact The Mortgage Center at Enterprise Bank at 877-671-2265.

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