Mortgage rates have been on the rise recently, and there are several key factors contributing to this trend. The first is inflation1. Inflation decreases the value of the US dollar and reduces the demand that investors have for mortgage-backed bonds1. When demand drops, the costs of mortgage-backed securities drop, resulting in increased interest rates for all types of mortgages1. This means that getting a mortgage can become more expensive as higher interest rates translate into higher monthly mortgage payments1.
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Another significant factor is the actions of the Federal Reserve. The Federal Reserve controls the federal funds rate, which are the interest rates that lenders charge one another for overnight loans in order to meet reserve requirements. The interest rate on other loans—like those attached to home loans—typically follows the direction of the federal funds rate1. Since 2022, mortgage lenders tended to raise their rates when the Federal Reserve raised its rate. The Fed raised its federal funds rate by 0.25% in March 2022 and said it would keep raising this rate in increments of between 0.25% and 0.5% until inflation drops.
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