The answer is important for every homebuyer to understand.

Mortgage rates are not simply chosen by the President, Congress or even the Federal Reserve. They are largely determined by financial markets and investors assessing what they believe inflation, economic growth and risk will look like in the future.

The Federal Reserve Doesn't Set Your Mortgage Rate

The Federal Reserve sets a short-term interest rate known as the federal funds rate. That rate influences borrowing throughout the economy, but it is not the 30-year mortgage rate.

Long-term mortgage rates tend to move more closely with longer-term bond yields, particularly the 10-year U.S. Treasury yield.

Sources: Federal Reserve, Open Market Operations and U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates

Mortgage lenders then price loans based on those market conditions, the value investors place on mortgage-backed securities, lending costs, risk and other factors.

That's why the Fed can cut its short-term rate and mortgage rates don't necessarily fall with it.

Inflation Is a Major Piece of the Puzzle

To understand mortgage rates, you have to understand inflation.

Investors lending money for long periods want to be compensated for the risk that inflation will reduce the purchasing power of the dollars they are eventually repaid.

If markets believe inflation will remain higher, investors generally demand higher yields on longer-term bonds. Those higher yields can translate into higher mortgage rates.

This is where events thousands of miles away can affect the interest rate on a home in Texas.

The Iran Conflict Is a Good Example

The current conflict involving Iran demonstrates how geopolitical events can influence American borrowing costs.

One major concern is energy.

The Strait of Hormuz is one of the world's most important routes for oil and natural gas shipments. A disruption, or even the increased possibility of one, can put upward pressure on energy prices.

Higher energy costs don't stop at the gas pump.

Fuel affects trucking. Transportation affects groceries and consumer goods. Energy affects manufacturing and businesses. Eventually, those higher costs can work their way throughout the economy.

If investors believe those pressures could produce additional inflation, long-term Treasury yields can rise.

So an international conflict can ultimately influence what an American homebuyer pays to borrow money.

Why Can't the Government Just Force Rates Lower?

The government can take actions intended to influence financial conditions, but it cannot simply declare that 30-year mortgages will now be 5%.

Treasury policy can influence the supply of government debt. The Federal Reserve can change short-term rates and, under certain circumstances, buy or sell securities. Fiscal and economic policies can also influence inflation and growth.

But financial markets are constantly evaluating those actions along with inflation, government borrowing, economic growth, employment, energy prices and geopolitical risk.

If investors remain concerned about future inflation or other risks, they may continue demanding higher yields regardless of what policymakers would prefer.

What Should Buyers Take From This?

Don't make a homebuying decision based on the assumption that someone in Washington will simply "bring mortgage rates back down."

Rates could decline. They could remain where they are. New inflation concerns or geopolitical developments could also push them higher.

Instead, make your decision based on the numbers you know today.

What payment can you comfortably afford? How much cash should you keep in reserve? How long do you expect to own the property? Is the home priced appropriately? And does purchasing it make sense for your longer-term financial goals?

If rates eventually decline enough to make refinancing worthwhile, that may create an opportunity later. But your purchase should make financial sense without depending on a future rate that no one can guarantee.

Understanding how mortgage rates actually work helps buyers make decisions based on economics rather than headlines.

The Debra West Team | RE/MAX