Does a drop in the Federal-funds rate influence the mortgage rates?
Mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note. Lenders typically set their base mortgage rate around two percentage points higher than the 10-year bond yield. Rates on adjustable-rate mortgages are tied to yields on two-, three- and five-year Treasurys. These short-term loans are more sensitive to Fed rate movements, and those with the shortest maturities see the greatest impact when short-term rates rise and fall.
