How does the Fed affect mortgage interest rates?

The Federal Reserve spent much of 2022 and 2023 bumping the federal funds rate higher in an effort to curb inflation. Although the Fed doesn't directly affect mortgage rates, its management of the federal funds rate influences mortgage lenders and (along with other factors) helps them decide how much interest to charge on mortgage loans.

If you're thinking about taking out a home loan, here's what you need to know about how the Fed does, and doesn't, impact your mortgage rate.

• What does the Federal Reserve do and how does it affect mortgage rates?
• Your personal mortgage rate
• Bottom line

The Federal Reserve, or Fed, is the central banking system of the United States. The Fed's main purpose, known as its dual mandate, is to provide price stability (i.e. manage inflation) and maintain sustainable employment levels.

One of the ways the Fed accomplishes its mission is by adjusting the federal funds rate. The federal funds rate is the benchmark short-term interest rate banks and other financial institutions charge each other for overnight loans. When the Fed raises this rate, it makes it more expensive for financial institutions to operate. Those institutions usually respond by charging more interest on loans. That means everything from auto loans to mortgages becomes more expensive for consumers.

Most of what goes into your mortgage rate is out of your control. However, there are personal factors involved. Your credit score, type of loan, loan amount and down payment all come into play.

As you increase your credit score and down payment, the mortgage rate you're eligible for will drop. You don't need a perfect credit score to secure a good rate. If you want the best rate, aim for a good to excellent credit score and a down payment of 20%. That said, a large down payment is less realistic for many first-time buyers and you can qualify for a mortgage with little to no down payment with government-backed loans, such as VA loans, USDA loans and FHA loans. Navy Federal Credit Union is one of CNBC Select's best mortgage lenders for a small down payment and can be a good option if you're eligible for a VA loan, which requires as little as 0% down.

Conventional mortgages that exceed what is known as the conforming loan limits are generally considered jumbo loans and tend to have higher down payment and credit score requirements. If you need a jumbo loan or are in the process of building your credit, Rocket Mortgage is a lender that could suit your needs. It's one of CNBC Select's best lenders for jumbo loans and one of our best lenders for bad credit scores. It offers FHA mortgages, which require a credit score of at least 580 and its Jumbo Smart Loan is available for loan amounts of up to $3 million.

The Federal Reserve doesn't directly set mortgage rates. However, it can influence mortgage interest rates by adjusting the federal funds rate and buying or selling bonds and mortgage-backed securities. There is a range of other factors that affect mortgage rates, including inflation, demand for mortgages and your individual situation.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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