Why Aren’t Mortgage Rates Falling?! Here’s What You Need to Know

You’ve seen the headlines recently—Jerome “J-Pow” Powell and the Federal Reserve are lowering interest rates to give the economy and housing market a boost. So why are mortgage rates still stubbornly high? If you’re waiting for rates to drop so you can buy a home, you might be thinking: What’s going on?

Here’s the thing—while the Fed’s actions have a huge influence over interest rates, they don’t directly control mortgage rates. Mortgage rates actually track much more closely with the 10-year Treasury bond rate. To understand why, we’ll unpack how government bonds work, why the 10-year Treasury bond is so important to mortgage rates, and how you can leverage military benefits to secure a home at the best rate possible.

How the U.S. Government Raises Money Through Bonds

When the U.S. government needs money to fund federal projects or cover expenses, it raises cash by selling debt in the form of bonds. Yes, you pay taxes to fund the government (the personal income tax makes up almost 70% of the government's total budget), but every year Uncle Sam spends extra throughout the year, money it didn't have. So it needs to get more, which it does by borrowing, just like you might take out a personal loan or credit card advance. In the case of the federal government, the way it promises to pay back what it borrows is by selling bonds, which are like contracts.

• What’s a Bond?: A bond is a loan made by investors to the government, where investors are essentially lending money to the government in exchange for future interest payments and a promise that their initial loan (principal) will be repaid when the bond matures.
• Types of Bonds: Bonds come in various durations, from short-term (1-year or 5-year bonds) to long-term (10-year or 30-year bonds). The bond’s duration determines how long the government keeps the investor’s money before paying it back.
• Interest Rates on Bonds: Generally, longer-term bonds pay higher interest rates because they lock up the investor’s money for a longer period. This additional risk makes investors expect a higher return.

Why Mortgage Rates Track with the 10-Year Treasury Bond

If the Federal Reserve doesn’t directly control mortgage rates, what does? The answer lies in the 10-year Treasury bond rate, which tends to move closely with 30-year mortgage rates. But why does the 10-year rate matter so much?

On average, Americans own a home for about 12.3 years before moving, refinancing, or selling (source: https://www.rubyhome.com/blog/average-length-homeownership/). Because of this average timeframe, mortgage rates are generally matched to the 10-year Treasury bond (12.3 is closer to 10 years than to any other bond duration of 1, 5, or 30 years). The reason is that the banks lending you money through a mortgage to buy a house need to compare this debt to other options for lending the money, such as lending it to the government by buying bonds.

The U.S. government is one of the most reliable borrowers in the world (for the U.S. to NOT pay back a bond would mean the U.S. government failed and ceased to exist!). The 10-year Treasury bond, backed by the government, is considered extremely safe. By comparison, individual mortgage borrowers are less predictable—some may default on their loans. So, mortgages are riskier than government bonds, and banks charge slightly higher interest rates on mortgages to account for this additional risk. For example as of this week, the 10-year Treasury yield is 4.341%, but a 30-year mortgage using a traditional 20% down conventional loan is at about 7.44%. That extra 3.1% is profit banks make by taking on the risk of lending their money to you and me instead of Uncle Sam.

The VA Loan Advantage for Military Members

For military members, there’s an added layer of good news. Thanks to the VA Loan Program, service members can often get lower mortgage rates than their civilian peers. In fact, this week a 30-year VA loan interest rate is just 6.94%, a full 0.5% cheaper than conventional mortgage rates your civilian friends and neighbors can get. That will save you about $400 a year for every $100,000 borrowed at the current range of interest rates. Among other reasons, this why the VA Loan is a game-changer for you:

1. The VA Guaranty Reduces Lender Risk: The VA Loan comes with a 25% guaranty from the Department of Veterans Affairs. This means that if the borrower defaults, the VA covers 25% of the loan amount, making it less risky for lenders. Because of this guaranty, lenders are more willing to offer competitive rates to VA Loan borrowers.
2. No Down Payment Requirement: VA Loans usually don’t require a down payment, which is an enormous benefit, especially when combined with lower rates. This means service members can get into a home with less cash upfront while benefiting from better financing terms than many conventional borrowers.

Consider this: the average "starter home" in 2024 costs about $200,000, which means your civilian buddy from high school needs to save at least $40,000 just to buy their first house. You, on the other hand, can become a homeowner for as little as $0 (although you should pay closing costs and put a little down if you can, so let's just say $10,000). Almost everyone in the U.S. military can become a homeowner in their first year on the job thanks to BAH or an enlistment bonus!

The “Unfair Advantage” for Military Real Estate Investing

In fact, a career in the military can be a fast track to financial freedom thanks to the VA Loan and real estate investing. 80% of America's 23,000,000 millionaires became wealthy through real estate investing, and yet most of them had to save 20% down payments on every property they bought -- or get real creative with borrowing and financing. You don't need 20% OR crazy financing strategies, thanks to the VA Loan!

With an almost "free" source of money to buy real estate and the knowledge that real estate investing (REI) is possibly the best strategy to become wealthy and financial free, everyone in uniform should consider it a requirement to have an REI strategy. If it was up to us, it would be mandatory training at Boot Camp!

• Building Wealth with VA Loans: With the flexibility of the VA Loan, military members have a unique opportunity to build real estate wealth. By buying homes with minimal upfront costs, living in them for 2-3 years, and saving cash for their next purchase, they can retain each property as a rental.
• How It Works: After living in a home, military members can refinance the loan, regain VA Loan eligibility, and move on to their next home purchase. Over time, this strategy allows service members to create a portfolio of rental properties with little down, all while leveraging the VA Loan benefit.
• End Game: An aggressive strategy could purchase a new home every year -- a more likely strategy would do this every PCS (every 3 years). That means you could over 20 years build a portfolio of 6-15 (or more) rental properties, generally enough to retire on the income if you decide!

As I closed out my military career, one of the most common questions I was asked by new recruits and new officers was, "is there anything you regret about your time in uniform?" YES -- NOT USING THE VA LOAN TO BUILD WEALTH FROM MY VERY FIRST DUTY STATION!!!

Mortgage Rates and Economic Expectations: What’s Next?

So by now you have a solid understanding of how mortgage rates are determined, and that in the military you can get lower rates with the VA Loan Program. But you still might have some doubt about whether now is the right time to unleash the power of the VA Loan and buy a home. After all, just a few years ago rates were at 2%, so shouldn't you just wait it out until we get back to 2%?

The reality is that 2% was most likely a once-in-a-lifetime thing never to be seen again. Over the past 50 years, the average 30-year mortgage has been 7.72%! That means that where we are today is totally normal for mortgages -- the low interest rates of the 2010s are no guarantee we'll ever go lower. 

In the real world, mortgage rates don’t just follow the Fed’s benchmark rate or the 10-year Treasury, they also reflect investor expectations for the U.S. economy. The 10-year Treasury bond rate, and therefore mortgage rates, are influenced by economic sentiment:

• When Rates May Drop: If economic data indicates a slowdown or potential recession, investors flock to the safety of Treasury bonds, which can push yields down. If the 10-year Treasury yield decreases, mortgage rates may follow suit. So, poor economic data or a looming recession can lead to lower mortgage rates. That's no reason to wish for a recession, though!
• When Rates Might Rise: Conversely, if the economy is showing signs of strength—like lower unemployment or strong consumer spending—bond yields may increase. When the 10-year Treasury yield rises, mortgage rates are likely to go up too, making it more expensive to borrow for a home.

In short, good economic news can mean higher mortgage rates, while signs of a recession could bring rates down. Knowing this, it’s smart for service members to stay plugged into economic news, especially if you’re planning to buy a home or refinance a mortgage in the near future. The fact that the fed is lowering rates now, but mortgage rates are "sticky" and not falling suggests that there's still not a lot of optimism about America's economy. But if rates start falling, things are looking up!

Conclusion: The Power of Staying Informed and Taking Action

Understanding what drives mortgage rates is crucial, especially for military members who have unique tools like the VA Loan at their disposal. Staying on top of financial trends and knowing when to act can make all the difference in securing the best possible rate and making the most of your hard-earned benefits.

At Military Wealth Coach, we keep you informed about economic trends, the latest in mortgage rates, and how to leverage your military benefits for maximum advantage. From weekly financial updates to in-depth Podcasts, we’ve got you covered.

Stay tuned to our blog as we close out 2024 for more expert insights on the VA Loan, homebuying, and real estate investing strategies tailored to military members. Don’t wait for the market to make decisions for you—take control of your financial future today!