The exterior of the Federal Reserve building.

Mortgage rates were supposed to get more affordable after the Federal Reserve cut rates in 2024. That did not happen, and if you’re in the market for a new mortgage, you probably are wondering why.

Talking heads, politicians, columnists, and market analysts have all offered a variety of answers to this question. But there’s one thing we can say for sure: Homebuyers need to keep a wary eye on Fed monetary policy moves if they hope to understand what’s going on with the mortgage market.

On January 28-29, the Fed held its first policy meeting of 2025 and opted to keep interest rates unchanged. The federal funds rate has remained on pause in a range of 4.25%-4.50% since December 2024. That month saw the last of three Fed rate cuts that were designed to help the U.S. economy get over its post-pandemic inflation headache.

Historically, changes in the federal funds rate and moves in mortgage interest rates are closely linked. But to the dismay of prospective homebuyers, mortgage rates have remained stubbornly high despite the big rate cuts of 2024.

So what’s causing the disconnect? Is there any hope in sight for lower mortgage rates? Let’s break down why mortgage rates have been stuck close to 7% for a 30-year, fixed-rate loan, how the 10-year Treasury yield factors in, and what you should know if you’re hoping to buy a home in 2025.

Understanding the federal funds rate

As explained by the Federal Reserve itself, “The federal funds rate is the interest rate charged by banks to borrow from each other overnight.” Big banks borrow money to balance their reserve requirements, and use the fed funds rate as their benchmark—and this sets the baseline for interest rates throughout the U.S. financial system.

It’s important to note that the Fed does not set rates for mortgages, credit cards, or other financial products. Rather, the rates that banks and other lenders set for some of these products may be influenced by the federal funds rate.

That’s particularly true for products tied to the prime rate, an index that’s based on the federal funds rate. Almost all credit cards in the U.S. have variable interest rates tied to the prime rate, for example.

Mortgage rates zig zagged after the 2024 Fed cuts

In the lead-up to the September Fed meeting and its immediate aftermath, mortgage rates briefly fell lower. Data from Freddie Mac show that the average rate on a 30-year, fixed-rate home loan was 6.09% as of Sept. 19, 2024, for example.

But after that brief honeymoon, rates rose steadily toward the 7% mark—with Freddie Mac data showing that threshold was crossed Jan. 16, 2025, when the average hit 7.04%.

Mason Whitehead, a branch manager with national lender Churchill Mortgage, explains that mortgage rates initially dipped because people had an expectation the Federal Reserve was going to move faster than it did and cut rates lower than it did. But, then it became clear the Fed was taking a cautious approach, as job and inflation data showed a relatively resilient economy.

“Once that reality started to sink in, rates started going up instead of down,” says Whitehead.

Plus, while homebuyers may think back wistfully to the sub-3% mortgage rates some consumers were able to snag in 2021, Whitehead notes that low rates are really a tool to stimulate the economy rather than the normal state of things.

“For rates to really drop, you need a recession or some other type of negative impact on the economy,” he says. “Rates are in the 6’s and 7’s primarily right now and, historically, that’s still a good and low-rate environment. The problem is that many people experienced a rate in the 2’s to 4’s during the pandemic and suddenly thought that was ‘normal’ and that rates in the 6’s are ‘high’ which is just not historically accurate.”

The key to high mortgage rates: MBS

It’s time to get a little technical. When you hear people talking about mortgage-backed securities—commonly known as MBS—understand that this is an investment asset consisting of a bundle of mortgage loans.

There are a few different types of mortgage-backed securities in terms of who they’re backed by and how the payment process works, but on a basic level you can think of them as a way investors can profit from mortgage debt carried by homeowners.

You should also know that MBS are one of the key assets the Fed holds on its balance sheet. Think of it as a pile of assets that the Fed purchases in times of economic stress to inject cash into the economy. Since early 2022, the central bank has been shrinking its balance sheet: As MBS reach maturity, the Fed is not buying new ones to replace them. The impact? Less money available for banks to lend out as mortgages.

“If the Fed buys less mortgage backed securities, on net, you’ll have less downside pressure,” says Jeffrey Roach, chief economist at LPL Financial.

In short, the Fed may have cut rates three times in a row last year before holding steady at its meeting in January, but that’s potentially less important than what the central bank is doing with its balance sheet.

Why do experts keep talking about the 10-year Treasury?

Treasury notes are a type of investment known for being relatively low risk compared to, say, volatile stocks. They’re available with different maturity periods, but the main one you need to pay attention to if you’re considering applying for a mortgage is the 10-year Treasury. Specifically, you need to pay attention to the 10-year Treasury yield, meaning the return an investor who buys such a note can expect to earn from it.

So why does this matter to prospective homebuyers? Well, the 10-year Treasury yield is widely considered one of the best indicators of what direction mortgage interest rates are moving. Historically, the Treasury yield and mortgage rates have moved in tandem about 85% of the time, according to mortgage lender Price Mortgage, citing Freddie Mac data.

It’s also worth noting that mortgage-backed securities, mentioned earlier, and 10-year Treasuries may compete for the same pool of investors—and the securities are often expected to offer a higher yield than the Treasury notes as repayment is not guaranteed.

The long and short of it for consumers thinking about applying for a mortgage is that if you see in the news that the 10-year Treasury yield is up, mortgage rates could very likely follow suit.

Three key factors that influence mortgage rates

1. Inflation and the national debt

Lenders keep a close eye on inflation forecasts, as they have a big impact on mortgage rates. According to Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting, when inflation expectations foresee stronger price gains, lenders set higher interest rates to protect their loan businesses. Snaith argues that the Fed hasn’t tamed inflation yet.

“You’ve heard the expression ‘you had one job,’” he says. “Well they have two jobs—to maximize employment in the economy and to keep inflation low and stable. They have not met that second part of the mandate because they have not been able to get inflation down to the 2% target level.”

According to the December 2024 Consumer Price Index, released in January, U.S. inflation is running at about 2.9%—approximately 45% higher than the Fed’s inflation target. Snaith suggests the central bank acted too quickly when it cut rates in the last quarter of 2024.

President Donald Trump has been vocal about his desire for the Fed to cut rates, but Snaith makes the case that a more effective approach over the long term would be for the administration to find ways to tackle the national debt. That’s because the government borrowing large amounts to cover budget deficits can put upward pressure on interest rates.

2. The type of mortgage you get

Much of the focus on mortgage rates often centers on fixed-rate loans, as those are by far the preferred option for American homebuyers. But, if you get an adjustable-rate mortgage, the state of the economy impacts whether your rate will increase or decrease when the loan enters an adjustment period.

Rates on ARMs are generally tied to an index such as the prime rate or the secured overnight financing rate (SOFR). And, as the prime rate tracks closely with the federal funds rate, when the Fed cuts or hikes that rate there can be implications for ARM holders.

Typically, an ARM will offer an initial fixed-rate period followed by adjustment periods where your rate can change (subject to certain caps on the frequency of increases and the maximum amount of increases).

3. Your credit profile

While market factors are outside your control, your profile as a borrower impacts the rate you get when applying for a mortgage. Typically, you’ll need a minimum credit score of 620 for a conventional loan from a private lender.

Requirements can vary for government-backed loans—for example, it may be possible to get an FHA loan with a credit score as low as 580, or even 500 if you bring a 10% minimum down payment.

How much of a difference does an excellent credit score make in terms of your rate and the money it could help you save? An estimate by lender Blue Water Mortgage using 2019 numbers showed that a rate for a borrower in the 760 to 850 credit score range might be more than 1.5 percentage points lower than the rate offered to a borrower with a score in the 620 to 639 range.

The takeaway

At its last meeting in 2024, the Fed indicated that it might cut rates twice in 2025. However, that doesn’t mean prospective homebuyers should wait hoping for lower mortgage rates later in the year.

If and when rates do drop, it’s very possible more buyers who were sitting on the sidelines will jump into the market—meaning it will be more competitive to get an offer accepted on a home in your target price bracket.

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How the Federal Reserve impacts mortgage rates