Mortgage Interest Rates

The mortgage market is just one of many markets competing for funds in the overall marketplace for credit. As such, funds tend to flow across markets in response to increased demand. Interest rates in all markets are thus correlated, with differences depending on factors such as the risk to any particular sector of the economy. It turns out that the interest rate on mortgages is linked fairly closely to the interest rate on ten-year government bonds. The interest rate on 30-year mortgages averages about 1.7 percentage points above the interest rate on 10-year U.S. Treasury bonds, as Chart 4 shows. During the financial crisis, the difference between the two interest rates increased quite a bit because of the perceived risk to mortgage loans, ranging between 2 and 3 percentage points from November 2007 to March 2009, but has declined since. In May 2016, the interest rate on mortgages was about 3.6 percent, while the interest rate on 10-year government bonds was about 1.8 percent, so the 1.8 percentage point difference between the two was not much above the historical average of 1.7 percentage points.

Mortgage interest rates 2016 June

Chart: Mortgage and Ten-Year Government Bond Interest Rates

Source: Federal Reserve Board data on interest rates

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