Mortgage rates fall, but not for the reason you are led to believe.
Mortgage rates remain volatile but are slowly heading downwards. The Federal Reserve cut their target rate, the Fed Funds, for the third time this year on 12/10/25. This recent .25% cut to the Fed Funds has now reduced the Fed Funds rate to 3.625%, with the target at 3.5% to 3.75%. The Fed Funds only directly impacts on one consumer interest rate, the Prime Rate, which fell to 6.75%. The Prime rate is 3% more than the highest target Fed Funds rate, currently at 3.75%.
The Fed Funds rate has an indirect impact on mortgage rates since moves by the Fed can influence trading in US Treasury Bonds. Bond yields have a direct impact on mortgage rates. When bond yields increase, mortgage rates go up and vice versa. After each of the prior two Fed rate cuts, mortgage rates increased after comments by Fed Chair Jerome Powell that spooked the bond market and caused less appetite for treasury bonds, which increased bond yields and mortgage rates.
We did not see an upward trend in mortgage rates after the December 10th rate cut because the Fed also announced they would stop selling off treasuries from their balance sheet into the bond market and will instead start purchasing $40B/month of treasures from the markets. By changing their stance from a seller to a buyer of treasuries, the Fed can manipulate the supply and demand of bonds, which reduces the bond yield and mortgage rates. More demand than supply causes bond yields to decrease and directly lowers mortgage rates. When the Fed is a seller and not a buyer of treasuries, the opposite happens with bond yields and mortgage rates rising.
At each of the last two Fed rate cuts, on September 17th and October 29th, comments from Powell caused less investment in US treasury bonds which caused bond yields to increase and mortgage rates to increase in step with bond yields. Mortgage rates are now very near to where they were prior to the September 17, 2025. Fed rate cut, but still roughly 1% lower than they were this time last year.
I am predicting a lower mortgage rate environment continuing into 2026, even though another January 2026 Fed rate cut is not guaranteed. As long as the Fed keeps buying $40B/month in treasuries, mortgage rates should stay in the current 6% APR range for 30 year fixed mortgages and may even fall into the high 5% APR range.
If you want an easy way to see where mortgage rates are going, follow the 10 year treasury bond yield, currently at 4.15%. When the 10 year bond yield falls below 4% and stays there for more than a few days, we could be heading in the high 5% APR range on 30 year fixed mortgages. Since September of 2025, the 10 year bond yield peeked below 4% a half dozen times for a few hours on those trading days and then went back above 4%.
Some of you may know that I have a 30-year-old daughter who lives in Berlin, Germany. Her name is Savita and you may have seen pictures of her here over the years as I have been putting out this newsletter since she was little, going back to 2003! Here is a recent picture of her that she shared with me.
Also, some of you may know that I am from Oakland, CA. I am a fan of the Golden State Warriors and am a season ticket holder. Here is a picture from a recent game at Chase Center with the other love of my life, Stacy, who is as big a fan of the Warriors as I am.
Wishing you all a very happy holiday season with love and good health in the new year!
As always, your mortgage guy,
Viral (Vic) Joshi
Home of Real Mortgage Advice®