Why rate cuts may or may not move mortgage rates
It’s a common assumption: if the Fed cuts rates, mortgage rates will fall too. In reality, mortgage affordability is influenced by several broader forces—from bond markets to investor demand—and don’t always react directly to Fed decisions. Understanding how the Federal Reserve’s interest rate decisions filter down to mortgages is key to making sense of how rate cuts may, or may not, improve your buying power.
How Fed decisions influence mortgage rates
When the Fed lowers the federal funds rate, it doesn’t directly touch mortgages, but it does trigger a chain of events that can influence them:
- Banks’ costs change: The Fed’s rate affects how much banks pay to borrow money from each other.
- Treasury yields adjust: Investors respond, and that shifts the returns (yields) on U.S. Treasury bonds.
- Mortgage rates align: Lenders look at those yields and add their own margin before setting mortgage rates.
Why mortgage rates don’t always fall after Fed cuts
Even with a Fed cut, mortgage rates could stay put—or climb—because of factors like:
- Lender cushions: Mortgage rates usually sit higher than Treasury bond yields. That gap is called the spread. If lenders think the market is risky, they may widen the spread and keep mortgage rates higher.
- Inflation expectations: If prices are expected to rise, lenders may hold mortgage rates steady or push them up.
- Investor pullback: Cuts can signal economic weakness, cooling demand for bonds and nudging mortgage rates higher.
How rate cuts may impact home affordability
Even a small decline in rates could be meaningful for your budget. Wondering how much more home you could afford if mortgage rates go down? Here’s a hypothetical example:*
| INTEREST RATE | ESTIMATED MONTHLY PAYMENT | HOME PRICE |
|---|---|---|
| Starting rate: 6.35% | $1,991 | $400,000 |
| -0.25% cut (6.10%) | $1,993 | $411,000 |
| -0.50% cut (5.85%) | $1,992 | $422,000 |
| -1.00% cut (5.35%) | $1,966 | $440,000 |
*For illustrative purposes only, based on 30-year fixed-rate term with 20% down payment. Excludes insurance and taxes.
PRO TIP
Curious how a rate change could affect your buying power? Try our Affordability Calculator.
Effect of rate cuts on monthly payment vs. home price
Rate cuts can benefit your wallet in two ways: trimming your monthly payment on the same loan amount or letting you qualify for a higher-priced home without increasing monthly costs. For instance, a 0.50% rate drop (e.g. 6.35% to 5.85%) on a $400,000 loan could reduce your payment by $129 a month—or expand your home buying budget, as indicated in the chart above.
PRO TIP
Run your own numbers with our mortgage calculators.
Constraints that limit your gains
Lower rates don’t always translate into more buying power. Here’s what can reduce the impact:
Rising home prices and market competition
Lower rates can boost affordability, but if home prices climb at the same time, savings can vanish. Cheaper borrowing may drive up demand, especially in a hot housing market, creating a home price vs. interest rate tradeoff that cancels out some of the benefit.
Credit, debt and down payment limits
Your personal finances matter just as much as interest rates. A lower credit score, high debt-to-income ratio or limited down payment can shrink your borrowing capacity.
Mortgage spread and risk premiums
Mortgage rates usually include a spread above Treasury yields, plus a risk premium. In uncertain markets, that cushion may grow, keeping rates higher.
Mortgage rate trends over time
Historically, mortgage rates rise and fall in cycles tied to inflation, economic growth and Fed policy. The Federal Reserve may influence the direction of rates, but day-to-day movements often come from the market itself. Compare our current mortgage rates to see how they’ve been moving.
Tips to maximize buying power
Lower rates are only part of the picture when it comes to home buying. Smart decisions about credit, lenders and loan types could help you maximize your buying power.
Pro Tip
Want a step-by-step look at the home buying journey? Our home buying guide can help.
Improve your credit profile
Your credit score is one of the biggest factors lenders look at when setting your rate. Even small changes can make a difference. Here are several easy ways to possibly give your score a boost:
- Make sure you are paying bills on time to show a consistent history.
- Pay down balances on credit cards or other loans.
- Avoid taking on new debt right before applying for a mortgage.
- Review your credit report for errors.
PRO TIP
Learn how a residential mortgage credit report shapes your loan options.
Compare lenders and get pre-approved
Lenders don’t all offer the same deal. Rates, fees and terms can vary—and factors like service quality, underwriting experience and local market knowledge can make a difference too.
After you’ve compared options, a pre-approval gives you a clearer picture of how much house you can afford before you start house hunting. Most pre-approvals are valid for 60 to 90 days, so time yours to when you’re ready to look.
Compare loan types
Fixed-rate and adjustable-rate mortgages (ARMs) react differently to rate changes. It’s worth comparing different types of loans to see which makes sense in today’s environment.
