Why you can trust us We may earn money from links on this page, but commission does not influence what we write or the products we recommend. AOL upholds a rigorous editorial process to ensure what we publish is fair, accurate and trustworthy.&xa0; The Fed's expected to cut rates again. Will it actually lower your mortgage? Kat Aoki October 28, 2025 at 7:38 PM 6 How the Federal Reserve affects mortgage rates (porcorex via Getty Images) lf you're considering buying a home or exploring refinancing, you've probably noticed that mortgage rates seem to have a mind of their own — sometimes moving up...
Why you can trust us
We may earn money from links on this page, but commission does not influence what we write or the products we recommend. AOL upholds a rigorous editorial process to ensure what we publish is fair, accurate and trustworthy.
The Fed's expected to cut rates again. Will it actually lower your mortgage?
Kat Aoki October 28, 2025 at 7:38 PM
6
How the Federal Reserve affects mortgage rates (porcorex via Getty Images)
lf you're considering buying a home or exploring refinancing, you've probably noticed that mortgage rates seem to have a mind of their own — sometimes moving up when you'd expect them to fall.
Finally, though, we're seeing relief for the average homebuyer, with rates dropping last week to the lowest levels in over a year. Add to that this week's Federal Reserve meeting, which is widely expected to deliver a second cut to the federal funds rate this year.
But here's the part that catches people off guard: The Fed's interest rate is for overnight lending between banks — and not mortgages. Your 30-year mortgage rate is actually tied to the 10-year Treasury note. And since Treasury yield rates move based on where investors think the economy is headed, they can rise even when the Fed cuts its short-term rate. The exception? Loans like adjustable-rate mortgages and home equity lines of credit tend to move more in sync with the Fed's policy.
Here's how to understand the connection between Fed rates and borrowing costs so you can make smarter calls on when to buy, refinance or tap into your home equity.
⭐️ Other stories in our Federal Reserve series
How Fed rate decisions affect your finances
How the Federal Reserve affects your savings
How the Federal Reserve affects your personal loans
How the Federal Reserve affects your student loans
Fast facts: What is the Federal Reserve?
The Federal Reserve is the nation's central bank with the mission to keep the economy humming by encouraging job growth while keeping inflation under control. The Fed's rate-setting arm — the Federal Open Market Committee (FOMC) — meets eight times a year to either raise, lower or hold steady its benchmark interest rate, called the federal funds rate (or Fed rate, for short).
This dual mandate isn't easy. The Fed attempts to balance the goals of keeping people employed with keeping prices from rising too rapidly — and critics argue these two ideas actually clash, saying that raising rates to control inflation can squeeze businesses and ultimately hurt employment.
🔍 Read more: We asked 7 experts: 'What's happening with the economy?' Here's what they said
How does the Federal Reserve impact what you pay for a mortgage?
For 30-year fixed-rate mortgages — the most popular type of mortgage loan — lenders start with the 10-year Treasury note as their baseline, then they take on a spread to cover costs, risks and profit margins.
That spread is made up of:
The primary mortgage spread. The difference between what you pay and what banks get when they sell your mortgage as part of a mortgage-backed security (MBS).
The secondary mortgage spread. The difference between what investors pay for mortgage-backed securities versus safer Treasury bonds.
The secondary spread averaged 0.71% from 2012 to 2019 but widened to 1.4% from January 2022 through November 2024, according to Fannie Mae. The good news: Total market spread has improved in 2025, declining to 237 basis points from 259 basis points a year earlier, providing some relief for homebuyers.
But the Fed influences this system indirectly. When the Fed changes short-term rates, it can affect investor expectations about future economic conditions, which moves Treasury yields up or down. Treasury yields also respond to inflation expectations, economic growth prospects and global economic conditions — factors that can move independently of Fed policy.
🔍 Read more: 6 ways to get the lowest rate on your next mortgage
🏡 How mortgage-backed securities affect mortgage rates
Most banks don't hold on to their mortgages — instead, they sell them to investors almost immediately to free up capital. These loans are bundled into mortgage-backed securities, which are sold to investors like pension funds and insurance companies.When the Fed changes rates or talks about inflation, it shapes investor expectations. If they expect inflation to rise, they demand higher rates on mortgage-backed securities. If they expect economic weakness, they're more willing to accept lower rates.It explains why mortgage rates sometimes move opposite to Fed policy: Even if the Fed cuts rates, mortgage rates can rise if Treasury yields climb due to inflation concerns or if investors demand higher premiums to buy mortgage-backed securities.
How the Fed rate affects adjustable-rate mortgages (ARMs)
Rates on ARMs are typically tied to the Secured Overnight Financing Rate (SOFR) or the prime rate. SOFR reflects the cost of borrowing cash overnight using Treasury securities as collateral. When the Fed raises or lowers rates, it influences the SOFR, which in turn affects ARM rates when they reset every six months after your initial fixed period ends.
This means if you have an adjustable-rate mortgage, you'll feel the impact of Fed decisions more quickly and directly than those with fixed-rate loans. When the federal funds rate rises, your ARM rate will likely increase at the next adjustment period.
🔍 Learn more: Is your ARM adjusting soon? Here's how to convert it to a fixed-rate mortgage
How the Fed rate affects home loans and HELOCs
Home equity lines of credit (HELOCs) and some home equity loans have a more direct connection to the Fed policy than other types of loans. That's because rates on HELOCs are linked to the Wall Street Journal Prime Rate, which is the base rate banks offer their most creditworthy customers. The prime rate, in turn, moves with the federal funds rate.
The prime rate is typically set about 3 percentage points above the federal funds rate and serves as a baseline for many consumer lending products. Since most HELOCs use the prime rate as their foundation, changes in Fed policy translate almost immediately to changes in what you'll pay on a home equity line of credit.
This direct relationship explains why HELOC rates have risen significantly in recent years. A $30K home equity line of credit (HELOC) increased from around 3.5% in early 2022 to more than 8% percent today, reflecting the Fed's aggressive rate-hiking campaign to combat inflation.
🔍 Read more: Home equity loan vs. HELOC: Which is a smarter move for borrowing right now?
What to consider if you're buying a house or applying for a mortgage
If you're entering the housing market, understanding Fed policy can help you time decisions somewhat, but it shouldn't be your only consideration. Here are some important things to think about before buying and getting a mortgage.
Before you start house hunting -
Consider if you're buying for the long haul. Buying typically makes the most sense when you plan to stay for at least five years or longer. This gives you time to build equity and recoup costs. If you need to sell sooner, you could lose money, especially in regional markets where home values are declining — like parts of Texas, Florida and other Sun Belt states that saw pandemic-era booms.
Be aware of market timing risks. Buying during price declines may offer opportunities for better deals, but means slower equity growth. Buying during rapid price increases means paying premium prices and risking negative equity if the market corrects. In either scenario, you could lose money if forced to sell quickly.
Build and maintain good credit. A score of 670 or higher can save you thousands over the loan's life. Even moving from 680 to 740 could shave 0.25% to 0.5% off your rate. Start with our five simple steps to cleaning up your credit.
Reduce your debt-to-income ratio (DTI). Keeping your DTI under 43% will help you qualify for a mortgage, so try paying down your credit cards, car loans and student loans before applying. The debt snowball and debt avalanche method are two time-tested strategies for reducing debt.
Save for a larger down payment. While you can buy with just 3% down or less, putting down 10% to 20% shows lenders you're lower risk. And a 20% down payment eliminates private mortgage insurance, saving you hundreds monthly.
Research the local market. Look at recent sales, price trends and neighborhood conditions. Understanding whether you're in a buyer's or seller's market can help with timing and negotiations.
During the mortgage process -
Shop around with multiple lenders. This could save you thousands, as mortgage rates can vary between lenders for the same borrower profile. Getting multiple quotes within a short timeframe — typically 45 days — counts as a single credit inquiry, reducing the impact on your credit.
Compare APRs — not just interest rates. Some lenders advertise low mortgage interest rates but offset them with high fees. The APR factors in origination fees, points and processing fees, giving you a clearer picture of your total borrowing cost.
Time your application carefully. Avoid major financial changes during the mortgage process — don't switch jobs, open new credit accounts or make large purchases between application and closing, as new credit or debt might derail your approval.
Consider different loan programs. Popular first-time homebuyer programs, FHA, VA, or USDA loans might offer better terms for your specific situation.
Budget for total housing costs. Your monthly payment — including your principal, loan interest, taxes, homeowners insurance and, if applicable, HOA fees — should ideally be no more than 28% of your gross monthly income.
Get a thorough home inspection and budget for potential repairs. Many homebuyers discover expensive repairs after moving in that weren't apparent during inspection, especially in older homes that have outdated plumbing and wiring, as well as new builds where corners were cut.
🔍 Read more: How to shop for a mortgage: A guide for smart homebuyers in 2025
Should you refinance your mortgage after Fed rates drop?
The Fed doesn't influence mortgage rates directly — rather, mortgage rates follow Treasury yields and investor sentiment in the bond market.
However, the decision to refinance involves more than just comparing your current rate to available rates, and changes in Fed policy don't automatically translate to lower mortgage rates or high benefits for refinancing.
When refinancing might make sense -
You can reduce your rate by at least 0.5% to 1%. This threshold helps ensure the savings outweigh the costs and hassle of refinancing. For example, dropping from 7% to 6% on a $400,000 mortgage saves about $240 per month (or $2,880 per year), which could justify closing costs of $8,000 to $12,000 over the long term of four years or more.
You plan to stay in your home long enough to recoup closing costs. Divide closing costs by monthly savings to determine your breakeven point. If refinancing costs $12,000 and saves you $240 monthly, you'd need to stay in the home for over four years to break even.
Your credit score has improved since your original mortgage. A jump from 680 to 740+ could qualify you for much lower rates regardless of market conditions. At any rate (no pun intended), it doesn't hurt to shop around for lenders and compare multiple quotes.
You want to refinance your ARM to a fixed-rate mortgage. Refinancing your adjustable-rate mortgage can provide payment stability, especially if you're facing a rate increase at the end of your ARM's fixed period. Even if rates are similar, locking in predictable payments might provide greater peace of mind.
You need to tap into home equity for major expenses. A cash-out refinance might make sense for home improvements or debt consolidation, but only if you can reduce your rate at the same time and plan to stay in your home long enough to recoup refinancing costs.
Potential drawbacks to consider -
Closing costs can range from 2% to 5% of your loan amount. On a $400,000 loan, expect $8,000 to $20,000 in fees including appraisal, title insurance, origination fees and other charges. These upfront costs can take years to recoup through lower monthly payments.
Extending your loan term might increase total interest paid over time. Moving from 25 years remaining on your current loan to a new 30-year mortgage means lower monthly payments, but potentially tens of thousands more in total interest. You're essentially trading short-term cash flow for long-term costs.
You'll restart the clock on building equity if you take out cash. Unlike home equity loans, a cash-out refinance reduces the equity you've built and increases your loan balance, meaning you start over on the path to owning your home outright. You're also converting an appreciating asset back into debt.
Your current rate might already be competitive despite recent changes. If you locked in a rate during the historically low period from 2020 to 2021, today's rates may not offer meaningful savings. A 3% mortgage from 2021 likely beats anything available today, making refinancing counterproductive regardless of recent market shifts.
💡 Key takeaways: Refinancing decisions should be based on your individual financial situation and long-term housing plans, and not only short-term interest rate movements. For example, even with the slight dip in mortgage rates following Pres. Trump's April 2 tariff announcement, mortgage rates have remained stagnant against continued economic uncertainty.
🔍 Learn more: When to refinance your mortgage: 4 key times when refinancing can make sense
Other stories you'll like -
How to recession-proof your home: Expert strategies every homeowner should know right now
Why did Jay-Z and Beyoncé take out a $57M mortgage? (Yes, there's a lesson in it for you)
Do you qualify for homebuyer assistance? You might — even if you've already owned a home
Cash-out refinance vs. home equity loans: Which is best in today's market?
Fact vs. fiction: Top 7 most common home equity myths
About the writer
Kat Aoki is a finance writer who's written thousands of articles to empower people to better understand technology, fintech, banking, lending and investments. Her expertise has been featured on sites like Lifewire and Finder, with bylines at top technology brands in the U.S. and Australia. Kat strives to help consumers and business owners make informed decisions and choose the right financial products for their needs.
Article edited by Kelly Suzan Waggoner
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