Mortgage rates have been steadily decreasing, now hovering around 6.2% for a 30-year fixed loan. While this offers hope to prospective homebuyers and homeowners considering refinancing, a question remains—will this trend continue? And how low can rates realistically go? While there are no guarantees in the volatile world of economics, one key indicator offers valuable insight: the 10-year Treasury yield. Let’s take a closer look at why this matters and what it means for mortgage rates in the coming months.

The Fed’s Influence

The Federal Reserve’s recent 0.25% rate cut lowered the federal funds rate to a range of 3.75%-4%, marking its second cut this year. While the Fed doesn’t directly set mortgage rates, its actions influence broader financial conditions—signaling support for growth and moderating inflation expectations. If inflation continues to cool and the job market softens, further easing in 2026 could push long-term yields even lower.

The Link Between Mortgage Rates and the 10-Year Yield

For decades, mortgage rates have closely followed the movement of the 10-year Treasury yield, a benchmark for long-term borrowing costs. When the yield rises, mortgage rates tend to follow; when it falls, rates usually come down. But they don’t move exactly in sync because of the “spread.”

The Spread: Mortgage Rates vs. Treasury Yields

Mortgage rates typically sit 1.5% to 2% above the 10-year Treasury yield. The current gap is around 2% (6.2% mortgage rate / 4.1% yield).

This spread exists for several reasons:

• Risk premium: Mortgages carry more risk than Treasury bonds, so lenders charge extra.

• Loan duration: A 30-year mortgage keeps lenders exposed far longer than a 10-year Treasury.

• Market conditions: Competition, investor demand, and overall sentiment all affect the spread. 

Historically, the spread averages around 1.8%, widening during uncertainty and narrowing as confidence returns. Lately, it has been tightening—a positive sign for borrowers.

Will Mortgage Rates Drop?

According to Fannie Mae’s October forecast, the average 30-year fixed rate could fall to 5.9% by late 2026 if key factors align: a steady 10-year yield near 3.8%, a narrower spread, and continued progress on inflation. Together, these could push rates into the 5.5%-6% range—the most affordable level since 2021.

For guidance on how these trends could affect your buying or refinancing plans, reach out today—I’ll help you navigate your next move with confidence.