How Does Inflation Affect Mortgage Rates?

Inflation has a direct impact on mortgage rates because it influences the overall economy and how lenders set interest rates. Here’s how it works:

1. Inflation Increases Mortgage Rates 

• Inflation reduces the purchasing power of money, meaning goods and services cost more over time.

• To combat inflation, the Federal Reserve often raises interest rates to slow down spending.

• Higher interest rates make borrowing more expensive, leading to higher mortgage rates for homebuyers.

2. Mortgage Rates Follow the 10-Year Treasury Yield 

• Lenders use the 10-year Treasury bond yield as a benchmark for mortgage rates.

• When inflation is high, bond investors demand higher yields, which pushes mortgage rates up.

3. The Federal Reserve’s Role 

• The Fed does not set mortgage rates directly but influences them by adjusting the federal funds rate (the rate banks charge each other for overnight loans).

• When the Fed raises rates to fight inflation, mortgage rates typically rise.

• When inflation cools down, the Fed may lower rates, making mortgages more affordable.

4. Home Affordability & Buyer Behavior 

• High inflation + high mortgage rates = more expensive monthly payments for homebuyers.

• This can slow down home sales and cause home prices to stabilize or drop in some markets.

• When inflation eases, mortgage rates tend to drop, making homes more affordable and boosting demand.

Bottom Line:

• Rising inflation → Higher mortgage rates → Harder to afford a home

• Lower inflation → Lower mortgage rates → More buying power