Understanding Mortgage Spreads and Their Impact on Your Home Financing Decisions

If you’ve been watching mortgage rates lately, you might’ve noticed something odd: even when the news says inflation is cooling or Treasury yields are dropping, mortgage rates don’t always follow.

So what gives?

It all comes down to something called the mortgage spread — and understanding it can help you make smarter decisions whether you’re buying, selling, or refinancing.

What Is a Mortgage Spread?

The mortgage spread is the difference between two interest rates:

• The rate on a mortgage (say, 7%)

• The yield on a similar-term U.S. Treasury bond (say, 4.5%)

In this example, the spread is 2.5%.

Why does that gap exist? Because lending money to a homeowner comes with more risk than lending it to the U.S. government. The spread is the cushion lenders build in to cover:

• Credit risk: What if the borrower can’t pay back the loan?

• Prepayment risk: What if rates drop and the borrower refinances early?

• Operational costs and profit margins

In short: the spread is the markup for all the “what ifs” lenders face.

📈 Why Mortgage Spreads Matter

Spreads have a big impact on what you pay as a borrower. Even if Treasury yields drop, a wider spread can keep mortgage rates high.

Historically, the spread between the 10-year Treasury and the 30-year fixed mortgage rate hovers around 1.75%–2.00%. But lately? It’s been above 3% at times — making borrowing more expensive than it should be, based on fundamentals alone.

What Makes Spreads Go Up or Down?

Spreads widen or tighten based on investor confidence, market volatility, and Federal Reserve policy. Here are a few things that can push them around:

• Uncertainty in the economy (investors get nervous, spreads widen)

• Reduced demand for mortgage-backed securities (MBS) (fewer buyers = higher risk = wider spreads)

• Fed not buying MBS like they used to (less support = wider spreads)

• Volatility in bond markets (lenders build in a buffer)

Why This Matters to You

If you’re a buyer or agent trying to time the market, watching just the Fed or inflation isn’t enough. Even if inflation falls, rates might not improve unless spreads also normalize.

Good news? Experts believe mortgage spreads could gradually tighten as the market calms down — especially if the Fed signals rate cuts or investor demand returns to MBS.

Bottom Line

Mortgage spreads are the hidden force behind rate trends. They explain why rates sometimes stay high even when economic news sounds promising. For buyers, sellers, and real estate pros, knowing this helps set expectations — and spot opportunities when spreads start to come back down.