What Affects the 30 Year Mortgage Interest Rate?

This past week, President Trump has continued to browbeat the Federal Reserve Chairman to reduce interest rates. Currently, the Federal Reserve Funds Rate stands at 4.33%.

This is the interest rate that banks and credit unions lend reserve balances to other banks and credit unions, overnight, on an uncollateralized basis. This rate establishes monetary policy for many other lending practices. It also influences other lending rates, as well as savings interest rates.

It has a major impact on the Prime Rate. This is the interest rate that commercial banks charge their most creditworthy customers. Currently, the Prime rate is approximately 3% greater that the Federal Reserve Funds Rate, 7.5% versus 4.33%.

President Trump believes that a drop in the Federal Funds Rate will lead to a major increase in homebuilding, and the sale of new and old homes, because he believes the mortgage interest rate will decrease significantly.

However, it isn’t that simple. The biggest driver in the 30 year mortgage interest rate is believed to be the 10 year Treasury Note Rate. This is the proxy for the 30 year mortgage interest rate. Lenders use this rate as a basis in setting the mortgage rates, because 10 years is the average duration of a mortgage loan.

Other factors that drive the 30 year mortgage interest rate, includes the monetary policy of the Federal Government, the economy, and inflation.

The Federal Funds Rate is a benchmark for short-term interest rates, and investors use this as a prediction of future monetary policy, and what they believe will have an impact on future rates. Depending on their comfort with the Federal Reserve, this will also drive investing decisions, and the applicable interest rate that they will accept.

Economic growth expectations will have a major impact on interest rates. The more uncertainty, the higher the rate. The same with inflation. If inflation is perceived to be high or increase, the higher the interest rate.

All of these factors affect the mortgage interest rate.

In today’s environment, there are a number of other issues that impact mortgage interest rates. Tariffs are a big unknown. When, where and how much! One day they are this and the next day they are something else.

The old axiom of supply and demand is also a factor. A few years ago, mortgage interest rates were in the 3% range. For the period 2010 through 2021, mortgage interest rates stayed in the 3 to 4% range.

Those who purchased homes during that time period are not interested in selling, because todays 30 year mortgage interest rate is in the 6.5% range. In addition, the home that was purchased 5 years ago has now seen its price appreciate almost 50%. For the past 10 years, home prices have appreciated approximately 6-7% annually. During the past 5 years, home prices have increased approximately 8-9% per year.

If we assume that a home was purchased 5 years ago for $300,000., with a 30 year conventional mortgage of $240,000., and with 20% down ($60,000.), at an interest rate of 3.99%, the monthly payment of principal and interest would amount to $1,144.41.

The value of that same home today would be approximately $435,000. If a 30 year mortgage would be obtained today, the down payment at 20% would amount to $87,000. and the mortgage would amount to $$348,000. The interest rate of that mortgage today, would approximate 6.58%, or a monthly payment of principal and interest of $2,217.94. That would amount to a 98.3 % increase in the monthly payment.

Is it no wonder that those who purchased homes during the time period of 2010 through 2021 are not selling. That reduces the supply of homes on the market, and tends to increase prices. High demand, low supply, higher prices.

I read a recent article concerning the fact that corporate employees were not moving on with other companies. There is uncertainty in the current workforce, and thus they tend to stay where they are. That also reduces the supply of homes on the market.

In 2025, the median price of a home is $462,206. That means that half are higher and half are lower. The average price of a home is $522,200.

The District of Columbia has the highest median price in the country at $1.39 million, followed by California at $906,500. West Virginia has the lowest median at $253,100., followed by Iowa at $255,200.

The states with the most population growth in the past 5 years, include Arizona, Washington State and Florida. In these states, home prices have increased 60% in the past 5 years, and 100% in the past 10 years.

Some additional factors contributing to lower inventory of homes for sale include new home construction is down, rents and home prices have been increasing at a greater rate than peoples income, the population is aging, and there has been an increase of 25 to 34 year olds living at home.

New home construction is down because construction costs have been increasing on everything from labor to materials. Labor is increasingly an issue, because the home building industry uses a high number of migrant workers. With the increase in deportations, they are no longer available.

In the year 2000, 20% of the population was over 55. In 2020, that has increased to 30%. These folks are not selling.

With the costs of everything increasing, more 25 to 34 year olds have chosen to live at home. Currently, over 16% of that population is now living at home.

Also, the birth rate in this country is significantly lower than in the past. That will have a major impact on housing demand and availability.

A National Association of Home Builders study, estimates that for every $1,000. increase in the median price of a home, 140,436 U.S. households will be priced out of the market.

Obviously, mortgage interest rates are influenced by many different factors. All of the above contribute to establishing that rate. The greater the unknown, the higher the rate, and vice versa.

The Federal Funds Rate is only a small factor contributing to the mortgage interest rate.

Jess Sweely

Madison, Va.

September 5, 2025