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 Treasuries. 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.

So if you want to know the direction of mortgage rates, you need to get a sense of where bond yields are heading. Investors tend to flock to the safety of U.S. Treasury when they’re worried about the state of the economy. That “flight to quality” drives bond prices higher and their yields lower. (Bond prices move inversely to yields.)

Rather than gamble and wait on lower rates, consider a lender that is willing to let your rate “float down” if mortgage rates drop after you’ve locked in your loan, but before the closing. Lenders often charge fees for float downs–typically around 0.25% of the loan balance–so make sure you understand the loan’s terms of the float down before you choose the option. Feel free to ask me for a Mortgage Broker referral.

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