If you’ve been watching interest rates and wondering, “Why is my mortgage still above 6% when the Federal Reserve keeps cutting rates?”, you’re not alone. It feels confusing — inflation is cooling, the Fed’s easing up, and yet, mortgage rates are stubbornly high.
Let’s unpack why this is happening, what really drives mortgage rates, and what it means for anyone thinking about buying or refinancing a home.
(This article is based on insights from Sharran Srivatsaa, originally published on The Next Billion.)
How Mortgage Rates Actually Work
One of the biggest myths in housing is that mortgage rates automatically move in step with the Fed’s interest rate decisions. While those short-term rates affect things like credit cards and car loans, long-term mortgages are driven by something else entirely — the 10-year U.S. Treasury yield.
Here’s the gist:
- Lenders use that 10-year Treasury yield as a benchmark when setting mortgage rates.
- Then they add a “spread” (or markup) to cover costs, risk, and profit.
- Normally, that spread sits around 1.5 to 2 percentage points — but lately, it’s closer to 3.
That’s why, even if the 10-year yield sits near 4%, your mortgage might still land around 6% or more. The larger-than-usual spread is keeping rates higher than most people expect.
Why That Spread Is Still So Wide
There are a few key reasons mortgage rates haven’t fallen much yet:
-
Inflation isn’t fully tamed.
Yes, inflation has cooled, but costs for essentials like rent, insurance, and groceries are still running high. Lenders want extra protection in case prices rise again, which keeps that “spread” inflated.
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The Fed isn’t buying mortgage-backed securities anymore.
During the pandemic, the Fed bought billions in mortgages to keep rates low. Now, those purchases have stopped — meaning private investors call the shots, and they want higher returns.
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Uncertainty adds risk.
From global tensions to rising national debt, investors see more risk in the market. The higher the perceived risk, the higher the rates they demand.
Until those pressures ease, it’s unlikely we’ll see rates fall back to the 3% range we got used to a few years ago.
What You Can Do Instead of Waiting for “Perfect” Rates
If you’re holding off on buying a home until rates drop significantly, you might be waiting a long time. But that doesn’t mean you don’t have options:
- Adjust expectations. Focus on what you can afford comfortably today instead of chasing a future rate that may never come.
- Consider refinancing later. You can always refinance if rates dip meaningfully — think of it as a “buy now, optimize later” approach.
- Shop lenders. Even in a high-rate environment, not all lenders offer the same deals. Comparing options can make a big difference.
- Look for value. Buying in areas with growth potential or desirable features can help offset higher monthly costs with long-term equity gains.
The Bottom Line
Mortgage rates aren’t high because the Fed forgot to cut them — they’re high because the broader bond market, inflation expectations, and investor confidence all play a role.
Understanding that gives you more control over your next move. Rather than waiting for the “perfect” rate, it might be time to make a strategic decision based on where things actually stand.
Because in today’s market, informed buyers and homeowners aren’t just watching rates — they’re finding smart ways to work around them.