How Does Inflation Affect Mortgage Rates?

Author: Joe Cassel

Published on: 6/26/2025|4 min read

Fact Checked

Author: Joe Cassel|Published on: 6/26/2025|4 min read

Fact Checked

Inflation can affect the prices of everything we buy, from what you pay for groceries to what you pay at the pump — and housing is no exception. Like inflation and real estate prices, inflation and mortgage rates are closely connected, which means the rate of inflation not only changes how much it costs to purchase a house, but also how much it costs to borrow money for a mortgage. Understanding the relationship between inflation and mortgage interest rates can help you make smarter financial decisions and better understand when it’s a good time to buy and what type of loan is best for you.

Key Takeaways

Inflation and mortgage rates often move together. As inflation rises, mortgage rates typically increase too, making home loans more expensive.
The Federal Reserve plays a major role. While the Federal Reserve doesn’t set mortgage rates directly, its actions — like adjusting the Federal Funds Rate — heavily influence borrowing costs.
Personal finances are a major influence on interest rates. Your credit score, income, debt, and loan type all help determine your mortgage rate, no matter what inflation is doing.
AmeriSave provides AI tools and resources to help you calculate how economic conditions and your personal finances impact your potential mortgage rate.

What is inflation?

Inflation occurs when the overall prices of goods and services increase over time. When prices increase, the purchasing power of each dollar you have decreases because it doesn't buy you as much as it used to.

An economy experiences inflation for many reasons, from increased production costs to increased demand and disruptions caused by government policies, natural disasters, or wars. A low level of inflation (typically around 2%) is normal and expected in an economy.

The economy is supposed to grow, which means people are earning more money and spending more money. When they do, demand increases and pushes prices up. Think about the cost of bread as an example. In 1980, bread cost roughly 50 cents per pound; in 2025, it's around $1.90. The reason bread costs more today is because it costs more to produce and transport bread than it used to.

When inflation outpaces wage growth, it can press people financially, often forcing them to borrow money to keep up with the rising cost of living. Like bread, prices for homes have also increased due to inflation, increasing mortgage demand. As a result, debt in America has increased to an average of around $105,000 per household --- most of which is mortgage debt.

How inflation and mortgage rates connect

Mortgage interest rates and inflation are closely related. They usually rise and fall together because of the Federal Reserve's policies and actions.

The Federal Reserve (also known as "the Fed") is a government agency tasked with overseeing the United States' monetary policy and promoting a stable economy. While the Fed doesn't control mortgage interest rates directly, it does set a target interest rate (the Federal Funds Rate) that banks use to lend each other money overnight. This, along with other tools, such as the Fed buying and selling U.S. Treasuries, affects loan types across the board --- including mortgages.

The Fed's policies and its target interest rate change based on how the economy is performing. When inflation rises beyond the 2% target, the Fed may increase the Federal Funds Rate to make borrowing more expensive and slow the rate of economic growth. When economic growth is lagging, the Fed can lower its target interest rate or purchase Treasury securities to make borrowing more affordable and stimulate the economy.

Other factors influencing mortgage rates

In addition to the Fed, there are a couple other key influencers on mortgage interest rates:

Supply and demand: When the economy and housing market are hot, there's a lot of demand to borrow money, which usually results in lenders increasing interest rates. But if there's not a lot of demand from borrowers, rates will generally drop.
10-year Treasury note: When the yield on the 10-year Treasury note increases or decreases, 30-year mortgage rates usually do the same. Most people sell or refinance their home after 7 to 10 years, meaning the 30-year mortgage and the 10-year Treasury note have a similar lifespan.

Other factors that might influence mortgage interest rates include geopolitical conditions, government policies, and a borrower's individual creditworthiness.

How inflation impacts different mortgage types

Inflation can have a significant impact on the terms of new mortgages, and even some existing mortgages. Though a fixed-rate mortgage has a set interest rate for the life of the loan, that rate is determined by the Fed's policies, which are influenced by inflation at the time you take out the loan. With an adjustable-rate mortgage (ARM), inflation impacts your rate changes at set intervals throughout the life of the loan.

If you're buying a house when interest rates are high, considering the relationship between inflation and mortgage rates can help determine which loan type or term length best fits your needs. For example, if inflation and interest rates are currently high and you think they'll drop in the next few years, you might decide to take out an ARM with a plan to refinance later.

If you already own a home, changes in inflation and mortgage rates impact financial decisions such as refinancing or taking out a second mortgage. For instance, when inflation is down and rates are lower, more homeowners look to lock in a lower interest rate by refinancing.

Making sense of mortgage rates

While mortgage rates and inflation are tied together, they don't tell the whole story when it comes to your rate. Lenders also consider your credit, income, and debt when setting your interest rate. The key is understanding how your finances fit into the bigger picture.

AmeriSave's digital tools and Loan Experts take the guesswork out of the process and help you navigate the mortgage options that make the most sense for you. Connect with us today to see what's possible --- and how much you could save.

Frequently Asked Questions

Inflation can indirectly influence interest rates on new fixed-rate mortgages. If you already have a fixed-rate mortgage, your interest rate is locked in and inflation won’t change your monthly payments.

The rate of inflation is a key factor that influences whether the Federal Reserve raises or lowers its target interest rate. When inflation is high, it usually results in higher interest rates. When the economy is slow and inflation is low — or if there’s no inflation at all — interest rates usually decrease. If inflation is near the target rate (typically 2% per year), then interest rates might hold steady until inflation picks up or slows down.

Overview
Key Takeaways
What is inflation?
How inflation and mortgage rates connect
Other factors influencing mortgage rates
How inflation impacts different mortgage types
Making sense of mortgage rates
FAQ

What is inflation? Inflation occurs when the overall prices of goods and services increase over time. When prices increase, the purchasing power of each dollar you have decreases because it doesn't buy you as much as it used to. An economy experiences inflation for many reasons, from increased production costs to increased demand and disruptions caused by government policies, natural disasters, or wars. A low level of inflation (typically around 2%) is normal and expected in an economy. The economy is supposed to grow, which means people are earning more money and spending more money. When they do, demand increases and pushes prices up. Think about the cost of bread as an example. In 1980, bread cost roughly 50 cents per pound; in 2025, it's around $1.90. The reason bread costs more today is because it costs more to produce and transport bread than it used to. When inflation outpaces wage growth, it can press people financially, often forcing them to borrow money to keep up with the rising cost of living. Like bread, prices for homes have also increased due to inflation, increasing mortgage demand. As a result, debt in America has increased to an average of around $105,000 per household --- most of which is mortgage debt. How inflation and mortgage rates connect Mortgage interest rates and inflation are closely related. They usually rise and fall together because of the Federal Reserve's policies and actions. The Federal Reserve (also known as "the Fed") is a government agency tasked with overseeing the United States' monetary policy and promoting a stable economy. While the Fed doesn't control mortgage interest rates directly, it does set a target interest rate (the Federal Funds Rate) that banks use to lend each other money overnight. This, along with other tools, such as the Fed buying and selling U.S. Treasuries, affects loan types across the board --- including mortgages. The Fed's policies and its target interest rate change based on how the economy is performing. When inflation rises beyond the 2% target, the Fed may increase the Federal Funds Rate to make borrowing more expensive and slow the rate of economic growth. When economic growth is lagging, the Fed can lower its target interest rate or purchase Treasury securities to make borrowing more affordable and stimulate the economy. Other factors influencing mortgage rates In addition to the Fed, there are a couple other key influencers on mortgage interest rates: Supply and demand: When the economy and housing market are hot, there's a lot of demand to borrow money, which usually results in lenders increasing interest rates. But if there's not a lot of demand from borrowers, rates will generally drop. 10-year Treasury note: When the yield on the 10-year Treasury note increases or decreases, 30-year mortgage rates usually do the same. Most people sell or refinance their home after 7 to 10 years, meaning the 30-year mortgage and the 10-year Treasury note have a similar lifespan. Other factors that might influence mortgage interest rates include geopolitical conditions, government policies, and a borrower's individual creditworthiness. How inflation impacts different mortgage types Inflation can have a significant impact on the terms of new mortgages, and even some existing mortgages. Though a fixed-rate mortgage has a set interest rate for the life of the loan, that rate is determined by the Fed's policies, which are influenced by inflation at the time you take out the loan. With an adjustable-rate mortgage (ARM), inflation impacts your rate changes at set intervals throughout the life of the loan. If you're buying a house when interest rates are high, considering the relationship between inflation and mortgage rates can help determine which loan type or term length best fits your needs. For example, if inflation and interest rates are currently high and you think they'll drop in the next few years, you might decide to take out an ARM with a plan to refinance later. If you already own a home, changes in inflation and mortgage rates impact financial decisions such as refinancing or taking out a second mortgage. For instance, when inflation is down and rates are lower, more homeowners look to lock in a lower interest rate by refinancing. Making sense of mortgage rates While mortgage rates and inflation are tied together, they don't tell the whole story when it comes to your rate. Lenders also consider your credit, income, and debt when setting your interest rate. The key is understanding how your finances fit into the bigger picture. AmeriSave's digital tools and Loan Experts take the guesswork out of the process and help you navigate the mortgage options that make the most sense for you. Connect with us today to see what's possible --- and how much you could save.