“Why does inflation drive mortgage rates?”
There are many factors that affect mortgage interest rates: your credit score, loan term, down payment amount, and debts are all factors that can raise or lower your rate. But some of the biggest factors driving interest rates are the economy and inflation. Inflation devalues the dollar, so as inflation increases, your purchasing power goes down, and the cost of a loan goes up. Inflation also lowers the demand for mortgage-backed bonds, and when demand goes down, the price of mortgage-backed securities also falls, resulting in higher mortgage rates. The Fed doesn’t directly determine mortgage rates, but it does control the federal funds rate (the interest rate that banks charge each other), and mortgage rates usually increase with these rates.
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