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What Affects Mortgage Loan Rates

When news breaks that the Federal Reserve has raised interest rates, you might think mortgage rates will climb, too. Even a small bump in interest rates could make you reconsider buying a home or refinancing an existing mortgage.

But when the Fed raised short-term interest rates in December 2015 for the first time in a decade, mortgage rates actually went down slightly.

In fact, activity by the Federal Reserve has little direct impact on mortgage rates. That's because long-term mortgage rates are more closely tied to the yield on the 10-year U.S. Treasury. The Fed raised rates more than 15 times in the mid-2000s, but mortgage rates remained stable (see chart).

SOURCE: HSH.com

What makes rates go up or down

There are a lot of factors at work when it comes to mortgage rates, with the benchmark being the 10-year Treasury yield. Though most mortgage terms are for 30 years, the average home loan is paid or refinanced within seven to 10 years, according to the National Association of Realtors. It makes sense for mortgage rates to reflect that timeframe.

There is certainly a relationship between the Federal Reserve and mortgage rates as well. The Fed raises or lowers rates in response to a host of economic conditions that also affect long-term mortgage rates – inflation, employment rates, U.S. and foreign stock market fluctuations to name a few.

You affect your mortgage rate, too

The interest rate on your home loan is influenced by economic indicators you can't control. But it may also be affected by things you can control, such as the size of your down payment, your credit history and whether you will pay upfront mortgage points at closing time. Talk to your lender about what you can do now to lower your interest rate for years to come.

Related terms to understand

The Federal Reserve is the central banking system of the United States, created by Congress in 1913 to provide a safer, more stable financial system. There are 12 regional Federal Reserve banks across the country that are supervised by a Board of Governors in Washington, D.C.

A 10-year Treasury is a debt obligation issued by the U.S. government that matures in 10 years. It pays interest at a fixed rate every six months and pays face value to the holder at maturity.