Home buyers have a lot of numbers to remember. Among them, the 30-year fixed mortgage rate may be the most important. After all, mortgage rates determine how much your monthly payment will be and, ultimately, how much house you can afford. But how are mortgage rates determined and why don’t they fall when the Fed cuts rates? Well, it’s complicated. The short answer, though, is that the federal funds rate is an interest rate on short-term lending, while a mortgage is a much longer-duration loan. So when the Fed cuts the federal funds rate, it has an influence but isn’t the ultimate determiner of where mortgage rates will head. For a better predictor of where rates are headed, you can look at rates on 10-year Treasury notes. Interest rates on 10-year Treasury notes and 30-year mortgages tend to move together because they both have a longer duration period. In the end, though, what determines interest rates is a combination of investor expectations, the job market, monetary and fiscal policy, the overall economy, inflation, and world events. In other words, they aren’t easy to predict – even for the experts. (source)
