Have you ever wondered why mortgage rates change so often? One day, you might hear about record-low rates, and the next, you’re told to lock in before they rise. While it can seem unpredictable, these shifts are closely tied to broader economic trends.
Fortunately, by understanding interest rates and why they might pivot, you can simplify the process of financing a new home — and recognize when the time is right based on your exact circumstances.
What Are Interest Rates?
Simply put, an interest rate is the cost of borrowing money.
When it comes to mortgages, your interest rate determines how much you’ll pay over the life of your loan. But these rates aren’t set at random — lenders adjust them based on key economic factors like inflation, financial markets, and even global events.
These factors influence the interest rate environment. However, you can still qualify for a mortgage when interest rates are higher. It’s important to remember that buying a home can be a strong move at any time, depending on your needs and financial profile.
Why Do Mortgage Rates Change?
After reaching historic lows during the COVID-19 pandemic, mortgage rates climbed above 8% by late 2023. As of early 2025, they have settled around 7.09%, according to Bankrate.com.
So, what drives these fluctuations? Let’s take a closer look at the biggest influences on mortgage rates.
Inflation
Inflation — the steady increase in prices for goods and services — is one of the strongest factors affecting mortgage rates.
Here’s why: As inflation rises, the value of money decreases over time. Lenders and investors (who buy mortgage-backed securities, or MBS) adjust by increasing rates to maintain their returns. This, in turn, makes borrowing more expensive for homebuyers.
The Federal Reserve
The Federal Reserve (or “the Fed”) doesn’t set mortgage rates directly, but its policies play a significant role.
The Fed’s decision-making body, the Federal Open Market Committee (FOMC), meets regularly to assess the economy and adjust short-term interest rates. These adjustments help either stimulate economic growth or slow inflation.
- When the Fed raises rates, borrowing becomes more expensive for banks, which often leads to higher mortgage rates.
- When the Fed lowers rates, borrowing costs decrease, and mortgage rates tend to follow suit.
Down the road, the opposite could hold true, with the Fed lowering interest rates in response to some of the factors we’ve discussed.
Financial Markets
Mortgage rates also respond to activity in the financial markets — especially Treasury bonds and mortgage-backed securities (MBS).
Investors seek returns that outweigh inflation and other risks. Since most home loans are bundled into MBS, the demand for these securities helps set mortgage rates. A good indicator? 10-year Treasury bond yields — when they rise, mortgage rates typically follow.
Global Events
Major world events — such as geopolitical conflicts, economic crises, and pandemics — can send ripple effects through financial markets, often influencing mortgage rates. You can still buy a home when these events take place, but the rates may influence how much home you can afford.
For instance, during uncertain times, investors tend to shift their money into U.S. Treasury bonds, which are seen as a safe haven. Increased demand for bonds lowers bond yields, which can, in turn, bring down mortgage rates.
A perfect example? The early days of the COVID-19 pandemic, when heightened investor demand for bonds contributed to record-low mortgage rates. This led to a nationwide spike in homebuying (and remarkable demand for financing).
What Happens When Interest Rates Rise or Fall?
Changes in mortgage rates have a direct impact on home affordability.
- When rates rise, monthly mortgage payments increase, making homes less affordable and often slowing down the housing market.
- When rates fall, borrowing becomes more affordable, encouraging homebuying and refinancing. Even a small rate drop can lead to significant savings over the life of a loan.
Regardless of whether rates rise or fall this year, financing a home could be in your future. To that end, please keep in mind that while interest rates may fluctuate, rents are also known to rise each year. This means that owning could lead to greater long-term stability.
How to Navigate Mortgage Rates in a Changing Economy
While interest rates are influenced by factors beyond your control, there are steps you can take to secure a more competitive rate:
Stay informed. Keep an eye on inflation, the Fed’s decisions, and market trends to better understand where rates might be headed.
Lock in when the time is right. If you’re in the market for a mortgage or refinance, consider locking in a rate that fits your budget — waiting too long can mean missing out on savings.
Strengthen your financial profile. Improving your credit score and increasing your down payment can help you qualify for a lower rate, regardless of market conditions. While mortgage rates may seem unpredictable, they’re deeply connected to the economy. By understanding the forces that shape them, you can make more confident decisions about home financing.
For more insights on the mortgage industry and market trends, visit our Market & Industry page.
Is Homeownership Still Worth It?
When interest rates are favorable, most people agree that purchasing a home is a smart investment for your financial future. However, when rates are higher, you might find yourself asking, “Is now the right time to buy?”
Despite fluctuations in interest rates, homeownership remains one of the most effective ways to build equity and generate long-term wealth for you and your family. While rent prices continue to rise (and rarely decrease, even in stable economic times), buying a home allows you to invest in something you own — rather than paying for a space that belongs to your landlord.
Given these factors, pursuing homeownership could still be a wise decision, as long as you’re financially prepared. If rates do drop in the future, refinancing your mortgage is always an option. In contrast, it’s unlikely that rent prices will fall in the years ahead, leaving you with no financial gain as a renter.
If you’re ready to learn more about your homeownership opportunities, find an experienced loan originator in your area.
