Mortgage Rates Fall Slightly to 6.65% Despite Bond Market Turmoil and Growing Concerns About Federal Debt

Mortgage rates dipped slightly this week, despite growing turmoil in the bond markets that help determine rates as investors grow wary of inflation and rising federal debt.

The average rate on 30-year fixed home loans dipped to 6.65% for the week ending Aug. 20, down 2 basis points from 6.67% the previous week, according to Freddie Mac. For perspective, rates averaged 6.58% one year ago.

"The 30-year fixed-rate mortgage declined this week averaging 6.65%," says Sam Khater, Freddie Mac's chief economist. "With a dip in rates providing modest relief for homebuyers, it’s important to remember borrowers can potentially save thousands by shopping around for the best mortgage rate.”

This comes after the 30-year Treasury yield hit a 19-year high earlier this week, spurring Treasury Secretary Scott Bessent to intervene with a buying spree of long-dated bonds, a move intended to prop up prices and surpress yields.

However, action on the 10-year yield, which is closely correlated to mortgage rates and more crucial for homebuyers, has remained more muted, notes Realtor.com® Senior Economist Jake Krimmel.

"Still, the action at the long end of the curve underscores fears over inflation and the fiscal outlook, and that could put upward pressure on mortgage rates in the coming weeks," says Krimmel. "No doubt, this is a tough setup heading into late summer and early fall, a stretch that traditionally suits buyers quite nicely."

Both the 10-year yield and mortgage rates have risen around 70 basis points since the start of the Iran war, which drove up global oil prices and spurred fears of renewed inflation.

Bond buyers, including investors in mortgage-backed securities, track inflation carefully, as they must ensure that the yield paid by the security is high enough to compensate for the falling purchasing power of the dollar. The higher inflation goes, the higher interest rates lenders must charge to borrowers.

Federal Reserve policymakers are now eyeing an increase to the benchmark interest rate later this year, if inflation does not fall substantially, recently released meeting minutes show.

As well, there are growing concerns about the sustainability of U.S. federal debt, which exceeded $40 trillion this week for the first time. Government debt has doubled over the past decade, and is now approaching 100% of annual GDP, a level not seen since the aftermath of World War II.

Although the U.S. benefits from robust global demand for its bonds, eventually the supply of Treasury bonds could exceed investor appetite for the notes, pushing prices down and yields higher. And if investors ever grew skeptical of the government's ability to repay its IOUs, yields would soar, creating a crisis with wide-reaching implications.

How your credit score affects your mortgage

Your credit score plays a role when you apply for a mortgage. A credit score will determine whether you qualify for a mortgage and the interest rate you'll receive. The higher the credit score, the lower the interest rate you'll qualify for.

The credit score you need will vary depending on the type of loan. A score of 620 is a "fair" rating. However, people applying for a Federal Housing Administration loan might be able to get approved with a credit score of 500, which is considered a low score.

Homebuyers with credit scores of 740 or higher are typically considered to be in very good standing and can usually qualify for better rates, which can reduce monthly payments.

Different types of mortgage loan programs have their own minimum credit score requirements. Some lenders have stricter criteria when evaluating whether to approve a loan. Ultimately, they want to make sure you're able to pay back the loan.