When the Federal Reserve announces it’s cutting interest rates, it’s natural to think mortgage rates will immediately follow suit. But the truth is, it doesn’t work that way. Mortgage rates often move independently of the Fed’s decisions because they are influenced by a different part of the financial system: the secondary market.

Let’s break it down in simple terms so you can understand how this works and what it means for you.

What Does the Fed Actually Control?

The Federal Reserve controls something called the federal funds rate. This is the interest rate banks charge each other for overnight loans. It’s a short-term rate and mainly affects things like credit cards, home equity lines of credit, and auto loans.

Mortgage rates, on the other hand, are based on long-term loans—usually over 15 or 30 years. They are tied to the bond market, specifically the yield on 10-year Treasury bonds, which don’t move in lockstep with the Fed’s actions.

How the Secondary Market Influences Mortgage Rates

Here’s where it gets interesting: when you get a mortgage, your lender doesn’t typically keep your loan. Instead, it’s bundled with other loans and sold to investors in the secondary market. Investors buy these loans because they offer a relatively stable return over time.

The rates offered to borrowers like you are based on what investors are willing to pay for these bundled loans. This pricing is heavily influenced by economic factors like inflation, economic growth, and global financial events—not just the Fed’s decisions.

Why Fed Rate Cuts Don’t Always Lower Mortgage Rates

The secondary market is forward-looking. This means that investors often anticipate what the Fed is going to do and adjust their pricing ahead of time. If the Fed is widely expected to cut rates, mortgage rates might have already dropped in the weeks or months leading up to the announcement.

Here’s an example:

• Imagine you hear the Fed is cutting rates by 0.25%. You might expect your mortgage rate to drop by the same amount. But if the bond market had already priced in that cut weeks ago, mortgage rates might stay the same—or even go up slightly—after the announcement.

What Should You Focus On Instead?

Instead of trying to time the market based on Fed announcements, focus on your personal goals and circumstances:

1. Refinancing: Is your current mortgage rate higher than what’s available today? Refinancing could save you money, regardless of Fed actions.
2. Buying a Home: Rates are just one piece of the puzzle. Finding the right home and mortgage product matters more in the long run.
3. Working with a Trusted Advisor: An experienced mortgage professional can help you understand how the market is moving and find the best solution for your needs.

Final Thoughts

While Fed rate cuts make headlines, they don’t directly determine mortgage rates. The bond market, investor sentiment, and broader economic conditions all play a role in shaping the rates you see.

If you’re wondering whether now is a good time to explore your mortgage options, let’s talk. At Northeast Financial, we’re here to help you navigate these complexities and make informed decisions that work for you.