Yet, mortgage rates and the 10-year Treasury tend to move in unison. If the 10-year Treasury yield moves higher, mortgages typically do, too — but with a margin of separation. Historically, the spread between the two has been between one to two percentage points.
To control the flow of water (money and credit), the Fed sets the federal funds rate, a benchmark interest rate that affects multiple parts of the economy. Consumers can see the impacts of the fed funds rate on products, ranging from savings accounts to mortgage rates.
While mortgage rates aren't directly tied to the Fed's actions, they're impacted by economic factors. Mortgage rates are tied to the 10-year Treasury yield and it's important to look at that number and where it's heading to understand where mortgage rates might be in 2024 and 2025.
Importance of the 10-Year US Treasury Note
The 10-year note is what most professionals in investment banking, equity research, corporate development, financial planning and analysis (FP&A), and other areas of finance use as the risk-free rate of return.
Market Conditions and Mortgage Rates
When inflation rises, bond yields increase, causing mortgage rates to rise as well. Economic Growth: Strong economic growth encourages higher bond yields, as investors expect interest rates to rise in response to growth. This pushes mortgage rates higher.
The 10-year Treasury note is a debt obligation issued by the U.S. government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing these notes.
The Federal Reserve influences mortgage rates, but doesn't set them. On Dec. 18, 2024, the central bank reduced the federal funds rate by one-quarter of a percentage point to a range of 4.25% to 4.5%, as markets had widely anticipated.
In our 2025 mortgage forecast, experts outlined a rough range between 5% and 7% for the average 30-year fixed mortgage. Most housing market forecasts predict rates landing around 6.4% at the end of the year.
A 10-year mortgage rate is the interest rate on a loan that must be repaid within ten years, resulting in higher monthly payments but significantly less total interest paid compared to longer-term loans. Most often, you'd see a 10-year term on a fixed-rate mortgage.
Central banks cut interest rates when the economy slows down to reignite economic activity and growth. The Federal Reserve (Fed) raises rates when the economy is overheating to prevent too much inflation.
While rate cuts impact bank lending, mortgage rates depend on supply, demand, and economic trends. If demand is strong, banks keep rates high to boost profits. Don't wait around—focus on improving your credit score and saving for a down payment to secure the best deal when rates align.
The National Association of Realtors: NAR's quarterly outlook has 30-year mortgage rates ending 2024 at 6.1% and bottoming out around 5.8% toward the end of 2025. After that, we could see rates tick back up to 6.1% in 2026.
Mortgages follow bonds, not bank rates
The Federal Reserve controls the rates at which banks loan money to each other overnight. But mortgages have a much longer lifespan, and as a result they most closely track 10-year U.S. Treasury notes – debt issued by the U.S. government and traded by investors in the bond market.
After 14 months of stagnancy, the Federal Open Market Committee (FOMC) lowered the federal funds rate three times in 2024, ending the year with a target range of 4.25% to 4.50%, the lowest since February 2023.
Fixed-rate mortgages are tied to the 10-year Treasury yield. When that goes up or down, fixed-rate mortgage rates follow suit. The fixed mortgage rate isn't exactly the same as the 10-year yield, however; there's a gap between the two.
NAHB: Rates Will Average 6.36% in 2025 and 5.93% in 2026. The National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the end of 2024 and fall below 6% by the end of 2025, according to the group's latest outlook.
The Mortgage Bankers Association (MBA) in its 2025 finance forecast indicates that mortgage rates will gradually slide from 6.6% at the beginning of 2025 to 6.3% through 2026. The National Association of Home Builders is forecasting 6.12% in 2025 and 5.71% in 2026.
Today's rates seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn.
Key Takeaways
Lenders make money upfront on mortgages through origination fees, which are typically a percentage of the loan amount. They may also charge discount points, where each point represents 1 percent of the loan amount and is paid upfront to lower the interest rate.
It's a rate reduction — but it's a modest one
For example, before September's significant 50 basis point cut, mortgage rates plunged to a two-year low. That's not likely to happen now, though. While a 25 basis point reduction may nudge mortgage rates downward it is unlikely to produce a major drop.
Considered one of the lowest-risk investments on the U.S. market, 10-year Treasurys are a “risk-free” benchmark against which other investments and debt are compared. (Three-month Treasury bills are another.) While no investment is ever completely risk-free, Treasury notes come close if held to maturity.
Taxation. Interest income from Treasury securities is subject to federal income tax but exempt from state and local taxes. Income from Treasury bills is paid at maturity and, thus, tax-reportable in the year in which it is received.
Interest payments: Once an investor owns a 10-year Treasury bond, they receive interest payments semi-annually. The interest rate is fixed and determined at the time of issuance. For example, if a 10-year Treasury has a 4% coupon rate, the investor will receive 2% of the bond's face value as interest every six months.