Decoding Mortgage Rates: What Drives Them and Why It Matters

At Baldwin Appraisals, we believe an informed client is an empowered one. In this article, we break down what actually drives mortgage rates and how the secondary mortgage market — particularly Mortgage-Backed Securities (MBS) — impacts borrowers, lenders, and real estate professionals alike.

Mortgage rates remain elevated as the Federal Reserve holds steady on its interest rate policy amid persistent inflation and global uncertainty. With 30-year fixed rates hovering near 6.8%, both homebuyers and investors are feeling the impact of a tighter lending environment. At the heart of it all is the mortgage-backed securities (MBS) market, which continues to play a dominant role in how rates are priced across the U.S. Understanding these dynamics is essential for making informed decisions in today’s real estate landscape. This article breaks down the key forces at play and why they matter to you.

Here’s what we expect at the next Federal Reserve meeting on July 29–30, 2025:

• The Fed is widely expected to hold its benchmark rate steady at 4.25%–4.50%, given that inflation remains above target and policymakers continue their data‑dependent stance

  
  

• While Fed Governor Christopher Waller has urged a 25 basis point rate cut in July, most officials—including Chair Powell—have shown little support for an immediate move

  
  

• Markets are not pricing in a cut this month; the strongest expectations are for the first rate reduction to arrive in September, with about a 60% likelihood, followed possibly by another later in the year

What’s Driving Mortgage Rates in 2025?

As of July 2025, mortgage rates have risen to around 6.89% for 30-year fixed loans. These increases aren’t arbitrary — they reflect deeper shifts in the financial system. Key drivers include:

- Rising yields on the 10-Year Treasury (currently around 4.4%)

- The Federal Reserve holding its rate steady at 4.25%–4.5%

- Sticky inflation in housing and core services

- Moody’s downgrade of U.S. credit

Together, these factors create a tighter lending environment and higher rates for borrowers.

How Mortgage Rates Are Calculated

Lenders don’t simply guess what rate to offer. Instead, they follow a general pricing model:

Mortgage Rate ≈ Treasury Yield + MBS Spread + Borrower Risk Adjustments + Lender Margin

Borrower-specific factors like credit score, loan-to-value ratio, income, and property type play a role. So do larger financial pressures — investor demand, capital costs, and bank profitability all shape what lenders charge.

Understanding Mortgage-Backed Securities (MBS)

MBS are investment vehicles made up of pooled mortgage loans. These are created by entities like Fannie Mae and Freddie Mac, who buy conforming loans from banks, bundle them, and sell them to institutional investors. In return, these investors receive monthly interest and principal payments.

This secondary market allows lenders to replenish their cash so they can continue issuing new loans — making MBS a critical backbone of the U.S. housing system.

Fannie Mae: Engine of the Secondary Market

Fannie Mae isn’t an MBS — it’s a Government-Sponsored Enterprise (GSE) that buys mortgages from banks. It pools them into MBS, guarantees payment to investors, and creates a uniform structure for national mortgage lending. This system reduces risk for investors and enables lenders to offer more competitive loan products.

Do All Banks Sell to MBS?

Not always. Some local or portfolio lenders keep loans on their own books. However, even those lenders must compete with MBS-based pricing, because the national market sets a reference point for what rates are considered acceptable. Whether or not a bank sells loans to Fannie Mae, the influence of the secondary market is inescapable.

Do All Banks Sell to MBS?

Not always. Some local or portfolio lenders keep loans on their own books. However, even those lenders must compete with MBS-based pricing, because the national market sets a reference point for what rates are considered acceptable. Whether or not a bank sells loans to Fannie Mae, the influence of the secondary market is inescapable.

At Baldwin Appraisals, we take pride in staying ahead of these market trends. If you have questions about valuations, refinancing timing, or how these rates impact your real estate portfolio, don’t hesitate to contact us.