If you’ve been thinking about buying a home, there’s a good chance mortgage rates are one of the biggest factors on your mind. Many buyers are hoping rates will fall significantly before they make a move. While rates can certainly change, understanding what actually influences them can help you make more informed decisions instead of trying to perfectly time the market.
Mortgage Rates Don’t Move on Their Own
Mortgage rates are influenced by several economic factors, but one of the most important indicators to watch is the 10-year U.S. Treasury yield.
Historically, mortgage rates and the 10-year Treasury yield tend to move in the same general direction. When investors are confident about economic growth or concerned about inflation, Treasury yields can rise. When economic uncertainty increases or inflation expectations ease, yields may move lower.
But mortgage rates aren’t identical to Treasury yields. There’s a gap between the two known as the mortgage spread.
What Is the Mortgage Spread?
Think of the spread as the additional percentage added on top of the 10-year Treasury yield to help determine mortgage rates.
Historically, that spread has averaged around 1.76 percentage points. During periods of economic uncertainty, however, the gap can become much larger.
In 2023, for example, the spread climbed to roughly 3.19 percentage points, contributing to significantly higher mortgage rates. More recently, that gap has narrowed considerably, moving much closer to its historical average.
And that's actually an important piece of good news for today's buyers.
Why Rates Aren’t Even Higher
Higher mortgage rates have certainly created affordability challenges, but the narrowing spread has helped keep borrowing costs from climbing even further.
When the spread was unusually wide, mortgage rates were pushed higher than Treasury yields alone would normally suggest. As that gap has returned closer to historical levels, some of that additional pressure has disappeared.
In other words, today’s rates could be noticeably higher if the mortgage spread had remained at the elevated levels we saw a few years ago.
That improvement has already provided some relief to buyers, even if rates haven't fallen as dramatically as many people hoped.
Could Mortgage Rates Still Come Down?
Yes. Mortgage rates can move lower, particularly if inflation continues to cool, economic conditions change, or Treasury yields decline.
But buyers waiting for a dramatic drop should remember that much of the improvement that could come simply from the mortgage spread returning to normal has already occurred. Future rate declines may depend more heavily on what happens throughout the broader economy.
And predicting exactly when those changes will happen is extremely difficult.
Don’t Let One Number Make the Entire Decision
A mortgage rate is important, but it’s only one part of buying a home.
Home prices, available inventory, your down payment, monthly payment, financial situation, and how long you plan to stay in the home all matter too.
Waiting for a lower rate could potentially reduce your monthly payment, but waiting also comes with trade-offs. Home prices could change, competition could increase, or the right property may no longer be available.
Instead of asking, “When will rates finally be low enough?” a better question may be:
“What would buying a home look like for me at today’s numbers?”
Running those numbers with a knowledgeable lender can give you a much clearer picture of what you can comfortably afford and whether buying now makes sense for your situation.
The Bottom Line
Mortgage rates may not be where buyers would ideally like them to be, but understanding why they’re at current levels provides some helpful perspective. The narrowing mortgage spread has already helped prevent rates from being even higher, while future movement will depend largely on Treasury yields, inflation, and the overall economy.
If buying a home is part of your plans, you don’t necessarily have to put those plans on hold while waiting for the “perfect” rate. Know your numbers, understand your options, and make your move when the timing makes sense for you.