21. Why are Mortgage Rates so much Higher than the Fed Funds Rate?

Short answer: The Fed funds rate is for overnight loans between banks. A mortgage ties up money for years and carries risks an overnight loan doesn’t. As of mid-October 2026, the 30-year mortgage rate (7.40%) was about 3.5 points above the effective Fed funds rate (3.88%). That gap has two parts:

Fed funds to the 10-year Treasury (~1.4 points): Investors expect to be paid more for locking money up for a decade, especially when inflation and federal borrowing are uncertain. The 10-year yield (5.24%) reflects those worries more than it reflects today’s Fed policy.

10-year Treasury to the mortgage rate (~2.2 points): Lenders and bond investors charge for prepayment risk (borrowers refinance when rates fall, so investors lose their higher-yielding loans), plus servicing and guarantee costs. Mortgages are priced off the 10-year rather than the 30-year because most are paid off within about a decade. This mortgage-to-Treasury spread has historically run about 1.7–2 points. It widened to around 3 points in 2023 and has narrowed since, but it remains somewhat above normal.