Why Mortgage Rates Are Where They Are Right Now

If you’ve been waiting for mortgage rates to drop significantly before making a move, you may be wondering how much longer you’ll have to wait.

The reality is that mortgage rates are influenced by several factors, and one of the most important is something called the spread between mortgage rates and the 10-year Treasury yield.

Understanding that relationship can help put today’s rates into perspective and may even make them feel a little less discouraging.

The Connection Between Treasury Yields and Mortgage Rates

Mortgage rates don’t move independently. They tend to follow the direction of the 10-year Treasury yield, which reflects investor expectations about the economy, inflation, and future interest rates.

The relationship isn’t perfect, and other factors can cause mortgage rates to move differently from Treasury yields in the short term. But over time, the two have generally moved together.

The difference between the two is known as the mortgage spread.

Historically, that spread has averaged around 1.76 percentage points. When the spread widens, mortgage rates can remain higher than expected. When the spread narrows, mortgage rates can move closer to the Treasury yield.

And that’s an important part of the story right now.

The Good News: The Spread Has Improved

Over the past few years, the mortgage spread became unusually wide as financial and economic uncertainty increased. In 2023, the spread climbed as high as roughly 3.19 percentage points.

That put additional upward pressure on mortgage rates.

More recently, however, the spread has narrowed considerably. It’s now around 2.01 percentage points, which is much closer to its long-term norm.

That improvement is one of the reasons mortgage rates today are lower than they could have been.

But there’s also a catch.

Because the spread has already improved so much, there may be less room for mortgage rates to fall simply because of further spread compression.

Why Rates May Not Drop Dramatically

It’s natural to hope mortgage rates will suddenly fall several percentage points. But that may not be the most realistic expectation.

Think of today’s mortgage rate as roughly the 10-year Treasury yield plus the mortgage spread.

With the 10-year Treasury yield around 4.68% and the current spread around 2.01 percentage points, that puts mortgage rates in the neighborhood of 6.69%.

If the spread were still as wide as it was in 2023, mortgage rates could be much closer to 8%.

That’s a significant difference—and it shows just how much the improvement in the spread has already helped today’s buyers.

If the spread eventually returned to its long-term average of about 1.76 percentage points, mortgage rates could move closer to roughly 6.5%.

In other words, there may still be room for rates to improve, but the biggest gains from a narrowing spread may already be behind us.

What This Means for Buyers

This doesn’t mean you should rush out and buy a home simply because rates have improved.

It does mean it’s worth looking at the bigger picture.

Waiting for the “perfect” mortgage rate can sometimes mean waiting for a market condition that may never arrive. Meanwhile, home prices, inventory, and competition can all change.

For some buyers, purchasing now and refinancing later if rates improve could make more sense than putting their plans on hold indefinitely. For others, waiting may still be the right decision.

The best approach is to look at your overall financial situation, not just the rate on the day you get a mortgage.

Bottom Line

Mortgage rates may not be as low as many buyers would like, but there is some encouraging news behind the numbers.

The mortgage spread has improved significantly, helping keep today’s rates well below where they could have been when that spread was unusually high.

And while rates could continue to move lower, the narrowing spread also tells us there may not be as much room for dramatic improvement as some buyers are hoping for.

If you’re wondering what today’s rates could mean for your buying power or monthly payment, let’s talk. I can help you look at the current market, connect you with a trusted local lender, and figure out what makes the most sense for your situation.

Ready to make a move? Reach out today and let’s start the conversation.