How 30 Year Mortgage Rates Are Set

Every time the Fed lowers short term interest rates there is a flood of questions asking: “Is it a good time to buy or refinance?”. For the majority of people who are looking at 30 fixed rate year loans, the answer is “No.”

Unlike credit cards, auto loans, and home equity lines of credit, Fed rate changes have little bearing on long terms rates which are more correlated to inflation and other macro level events.

(Note: Because of refinancing, the average life of a 30 year fixed rate mortgage is closer to 10 years. Therefore a 10 year treasury is often used to index a 30 year fixed rate mortgage. The fixed rate mortgage will always be higher than the 10 year treasury because there is inherently more risk in a mortgage than a US government backed security.)

Below is a correlation of the fed funds rates, the 10 year treasury, and the average 30 year fixed mortgage rate. Recently, there is a divergence between the 10 year treasury and the 30 year mortgage rates. While the 10 year treasury has gone down, mortgage rates have stayed flat or increased.  This is due to the recent problems in the sub-prime mortgage industry.

Hope this helps clarify a few things. You can check the latest mortgage rates on Credit Karma.