In September 2024, the Federal Reserve cut its benchmark rate by half a percentage point. Over the following two months, the average 30-year mortgage rate went up, from 6.09 percent the day after the cut to 6.84 percent by November 21. Fannie Mae’s economists wrote a whole explainer because so many people asked them the same question: how does the Fed cut rates and my mortgage quote gets worse?
The answer is that the Fed does not set mortgage rates, and understanding how mortgage rates are set actually means understanding two different spreads stacked on top of a government bond. Neither of those spreads is controlled by the central bank, and one of them has been running well above its historical size for four years now. That gap, not the Fed, is why a rate cut in the news so rarely turns into a smaller payment for you.
Your mortgage rate starts with a bond nobody sold you
The federal funds rate is the price of overnight lending between banks. It is the shortest of short-term money. A 30-year mortgage is the opposite kind of promise, so it gets priced off a long-duration benchmark instead: the 10-year Treasury note.
Why the 10-year, when the loan runs 30? Because almost nobody keeps a mortgage for 30 years. People sell, refinance, or pay off early, which puts the average life of a mortgage somewhere in the 7 to 10 year range. Lenders and investors actually benchmark against a blend of 5, 7, and 10-year Treasury yields, and as Fannie Mae explains, the 10-year is the usual shorthand.
The 10-year yield itself is set by investors deciding what they will accept to lend to the government for a decade. That number reflects their expectations for inflation, growth, government borrowing, and yes, monetary policy, but expectations of policy years from now, not the move the Fed made this month. This is the part most explanations get right and then stop at. The Treasury yield is where your rate begins, not where it lands.
In early August 2026, the 10-year sat near 4.67 percent. Freddie Mac’s weekly survey put the average 30-year fixed mortgage at 6.69 percent for the week of August 6, up from 6.66 percent the week before and slightly above the 6.63 percent of a year earlier. So roughly two full percentage points of your rate are not the Treasury yield at all. They are the spread, and the spread has two halves that pay two different sets of people.
The first spread pays whoever makes and services your loan
Most mortgages do not stay with the bank that wrote them. They get packaged into mortgage-backed securities and sold to investors. The gap between the rate you are quoted and the yield on the resulting security is called the primary-secondary spread, and it covers the cost of the whole origination machine: underwriting, compliance, the loan officer, the servicer who collects your payment every month and handles your escrow, and the guarantee fee Fannie Mae or Freddie Mac charges for promising investors they will get paid even if you stop paying.
That guarantee fee is itself split into an administrative piece running around 25 basis points and a credit risk piece near 36 basis points, which is essentially the price of insurance on your loan. Fannie Mae’s research puts the primary-secondary spread at an average of 0.5 percentage points from 1995 to 2005, rising to about 1.01 points after the financial crisis, mostly because originating a mortgage got more expensive and more heavily documented.
This is the half of your rate that responds to you. Your credit score, your down payment, whether you shop three lenders or accept the first quote, whether you pay points to buy the rate down: all of that moves within this spread. It is not enormous, but it is the negotiable part, which is exactly why lenders would rather talk with you about anything else.
The second spread pays investors to tolerate a loan you can cancel
The other half is the secondary spread, the gap between what a mortgage-backed security yields and what the 10-year Treasury yields. Investors demand extra here for a specific reason, and it is a strange one: you can prepay.
A Treasury note pays what it promises for its full term. A pool of mortgages does not, because when rates fall, borrowers refinance and hand the investor their principal back precisely when there is nothing good to reinvest it in. When rates rise, nobody refinances and the investor is stuck holding a below-market bond for years. Heads you lose, tails you lose slightly differently. That asymmetry is what the extra yield compensates for, along with a smaller amount of credit risk.
Historically this spread was around 1.17 points from 1995 to 2005, then settled to a calm 0.71 points from 2012 to 2019, a stretch when the Federal Reserve was buying mortgage-backed securities in volume. From January 2022 through late 2024 it averaged 1.4 points and peaked near 1.73. The driver is not lender greed. It is that the Fed stopped replacing the mortgage bonds rolling off its balance sheet, and private investors who actually care about yield have to absorb the supply the central bank used to swallow. Rate-sensitive buyers charge more than a buyer who did not care. That is the whole mechanism.
So the Fed does influence your mortgage rate, just not through the lever everyone watches. It moves the secondary spread through what it does or does not buy, which is slower, quieter, and almost never mentioned on the day of a rate decision.
Two-tenths of a point is $79 a month
Put numbers on it. In the calmer 2012 to 2019 period, the two spreads together ran about 1.72 percentage points. Add that to today’s 4.67 percent Treasury yield and the 30-year mortgage would be quoted near 6.39 percent. The actual number is 6.69 percent, because the spread is closer to 2.02 points.
On a $400,000 loan over 30 years, 6.69 percent costs $2,578 a month. At 6.39 percent it would be $2,499. The difference is $79 a month, $948 a year, and about $28,459 across the full term of the loan, and every dollar of it is compensation for conditions in the bond market rather than anything about you as a borrower. An 800 credit score and 30 percent down will not get you out of it.
What knowing how mortgage rates are set changes for you
The most useful habit this buys you is watching the right number. When the Fed is expected to cut, do not assume your quote improves. The 10-year Treasury yield is published everywhere daily, it moves ahead of Fed decisions rather than after them, and it is the thing your rate is actually tethered to. Bond investors are trading on what they expect the Fed to do over years, so by the time a decision is announced the yield has usually already absorbed it. Compare that with how the prime rate prices the rest of your debt, which does move in lockstep with the Fed. Your credit card and your mortgage behave nothing alike because they are hanging off different pegs.
The second habit is shopping hard inside the piece that belongs to you. Lender margin, points, and origination fees all live in the primary-secondary spread, and two quotes pulled the same afternoon for the same borrower can differ by a quarter point or more. Nobody is going to volunteer which part of your rate is negotiable.
And keep an eye on the secondary spread itself. If it drifts back toward the 0.71 points it averaged from 2012 to 2019 while Treasury yields hold where they are, mortgage rates drop about three tenths of a point with no Fed action whatsoever. On a $400,000 loan that is the $79 a month from a few paragraphs ago, arriving with no announcement and no headline. It is the sort of refinance window people notice three months late.