If you’re a current or future homeowner, you’ve probably noticed how unpredictable mortgage rates have been lately. But what’s driving these changes? Beyond the Federal Reserve’s interest rate adjustments, factors like the U.S. national debt, credit ratings, and inflation play significant roles in determining the cost of borrowing. Understanding these influences can help you make better decisions about when to buy or refinance a home.

Here’s what’s happening and what it means for your mortgage.

The U.S. national debt has reached unprecedented levels, climbing to $34.8 trillion as of mid-2024, according to the Department of the Treasury. This debt is equivalent to 120% of the nation’s GDP, one of the highest levels since World War II.

Credit rating agencies like Morningstar DBRS, Moody’s, and Fitch Ratings monitor this debt closely. When these agencies lower the U.S. credit rating, it signals to investors that lending to the government is riskier. This can lead to higher yields on government bonds, which in turn pushes mortgage rates higher.

Most home loans are funded through mortgage-backed securities (MBS), which are closely tied to government bonds. If investors demand higher yields for government debt, they often demand the same for MBS, resulting in higher mortgage rates.

For example:

• Fitch Ratings recently downgraded the U.S. from AAA to AA+, citing concerns over rising debt and fiscal uncertainty.

• Moody’s has warned that without changes to government spending and revenues, U.S. creditworthiness may face further risks.

Although the Federal Reserve has cut short-term interest rates twice this year, in September and November, mortgage rates haven’t followed suit. Why? Inflation and economic uncertainty have kept long-term rates high.

• Higher Inflation = Higher Mortgage Rates: Investors fear that inflation will reduce the value of returns on long-term investments like mortgages. This pushes them to demand higher yields on MBS.

• Fed’s Quantitative Tightening: The Fed has been reducing its $8.5 trillion balance sheet, which includes government debt and MBS. While this is intended to stabilize the economy, it also puts upward pressure on rates by reducing demand for these securities.

The U.S. government’s recurring debt ceiling crises add another layer of unpredictability. When Congress delays raising the debt ceiling, it increases fears of a default, which can cause mortgage rates to spike temporarily.

For instance:

• In 2023, mortgage rates rose twice during debt ceiling negotiations as investors demanded higher yields on U.S. debt.

While mortgage rates may stabilize somewhat, they are unlikely to drop significantly in the near term due to these broader economic pressures. If you’re planning to buy a home, it’s important to account for potentially higher borrowing costs.

Pay close attention to key events, such as debt ceiling deadlines or Federal Reserve policy announcements. These can cause short-term rate fluctuations, which might create opportunities to lock in a lower rate.

Rising rates mean higher monthly payments. For instance, a small increase in mortgage rates can add hundreds of dollars to your monthly payment on a $300,000 loan. Consider working with a mortgage professional to understand your options, such as buying down your rate with discount points.

The U.S. national debt, inflation, and political polarization are not issues that will be resolved overnight. However, their impact on mortgage rates highlights the importance of fiscal discipline and sound policymaking.

While the Federal Reserve has tools to influence rates, other factors, like the government’s ability to manage debt and inflation, play equally critical roles. As homeowners and future buyers, staying informed about these trends can help you navigate the housing market with confidence.

1. Economic Uncertainty Drives Rates: Rising national debt, inflation, and political uncertainty contribute to higher mortgage rates.

2. Watch for Short-Term Opportunities: Key events like debt ceiling negotiations and Federal Reserve announcements can cause temporary rate dips.

3. Prepare for Long-Term Trends: Budget for potentially higher rates and work with a professional to explore strategies like rate locks or discount points.