A Little-Known Factor That Could Help Lower Mortgage Rates—But Don’t Wait Too Long!

If you’ve been waiting for the right moment to buy a home or refi, things are looking up! While home prices are still high and inventory remains limited, a promising shift is happening behind the scenes that could soon lead to mortgage rates inching downward again.

This is thanks to a key factor: the mortgage spread.

What Is the Mortgage Spread and Why Does It Matter?

The mortgage spread is simply the difference between the average 30-year fixed mortgage rate and the yield on the 10-year Treasury bond. Historically, this spread has hovered around 1.8 percentage points. For example, if the Treasury yield is 4%, mortgage rates would average around 5.8%. But in 2022, the spread surged, going above 3 percentage points, which pushed mortgage rates up to around 7%—even as Treasury yields stayed steady.

Now for the good news: in recent weeks, this spread has been shrinking! It’s now down to around 2.25 percentage points --great news for protective homebuyers and those looking to refi.

Why Did the Spread Widen in the First Place?

Interestingly, the widening of the spread wasn’t caused by a financial crisis or downturn. Instead, it happened when the Federal Reserve—the largest buyer of mortgage-backed securities—pulled back from the market in 2022.

The Fed had been purchasing these securities since the 2008 financial crisis to stimulate the economy, and it resumed in 2020 during the pandemic. But in 2022, the Fed changed its strategy to tackle inflation and stopped buying.

Without the Fed’s massive buying power, there was less demand for mortgage-backed securities, which caused rates to rise. While other buyers, like banks and asset managers, stepped in, they couldn’t fill the gap left by the Fed. This led to higher mortgage rates across the board.

A Positive Outlook for Mortgage Rates

Now that the spread is narrowing, it’s a sign that the market is stabilizing and adjusting to the new landscape. While the Housing Finance Policy Center experts say the spread might not return to pre-2022 levels, there’s still plenty of optimism. 

What Does This Mean for You?

For prospective homebuyers and those looking to refinance, the current narrowing of the spread represents a unique opportunity. While rates could continue to drop, the uncertainty of when and by how much means you don’t want to wait too long. Acting now could save you big over the life of your mortgage.