What Every Borrower and Broker Needs to Know About How Rates Really Work

By Jennifer Cabrera | CEO, Atlantic Union | Founder, New Century Mortgages LLC

The Fed just cut rates. So why did your mortgage rate go UP?

If you've been waiting for the Federal Reserve to lower rates so you can lock in a better mortgage, you're not alone. It's one of the most common assumptions in real estate: Fed cuts rates, mortgage rates drop.

It doesn't work that way. Never has.

In fact, mortgage rates often move in the opposite direction of Fed rate cuts. And if you don't understand why, you could end up timing the market completely wrong — or giving your clients bad advice.

The Thermostat vs. The Weather

Here's the simplest way to understand it:

→ The Fed controls the thermostat in one room. That's the federal funds rate — the overnight rate banks charge each other. It directly affects short-term and variable-rate products like credit cards, HELOCs, auto loans, and business lines of credit.

→ Mortgage rates depend on the weather outside. A 30-year fixed mortgage is a long-term instrument. Its pricing is based on what investors expect inflation, economic growth, and risk to look like over the next decade — not what the Fed did yesterday.

The bond market decides the weather.

You can crank the thermostat all you want — it won't change whether it's raining or sunny outside. The Fed can cut rates, but if the bond market sees inflation coming or the economy heating up, mortgage rates will rise anyway.

We saw exactly this in late 2024. The Fed cut rates multiple times. Mortgage rates climbed. The bond market was pricing in stronger growth and persistent inflation concerns — the Fed was easing, but the weather wasn't cooperating.

What Actually Drives Mortgage Rates

Mortgage rates are primarily driven by the 10-Year Treasury yield and the pricing of mortgage-backed securities (MBS) in the bond market.

When you get a mortgage, that loan typically gets bundled with thousands of others and sold to investors as a mortgage-backed security. Those investors are making a bet on long-term returns — and they're competing with other safe investments like Treasury bonds.

When Treasury yields rise, MBS have to offer better returns to stay competitive. That means higher mortgage rates. When Treasury yields fall, mortgage rates tend to follow.

So what moves Treasury yields and MBS prices?

• Inflation expectations — If investors believe inflation is coming, they demand higher yields to compensate. Mortgage rates rise.
• Economic outlook — Strong jobs reports, GDP growth, and consumer spending signal a hot economy. Investors anticipate inflation. Weak data? Rates drop as investors flee to bonds.
• Global demand for U.S. debt — When there's uncertainty abroad, foreign investors buy U.S. Treasuries as a safe haven. More demand = lower yields = lower mortgage rates.
• The Fed's balance sheet — During the pandemic, the Fed bought trillions in MBS to keep rates low. Now they're letting those holdings roll off — removing a major buyer and putting upward pressure on rates.

What About DSCR and Non-QM Loans?

Everything above applies to conventional, agency-backed mortgages — loans sold to Fannie Mae and Freddie Mac. But if you're an investor using DSCR loans, or a self-employed borrower using bank statement or asset-based financing, the game changes.

Non-QM loans live in a completely different market.

These loans don't get sold to the agencies. They're purchased by private investors and securitized in the private-label market — or held on a lender's balance sheet. Pricing is driven by different forces:

• Private investor appetite — When institutional investors are confident and hungry for yield, capital flows into non-QM. More competition means tighter spreads and better rates. When investors get nervous, spreads widen and rates jump.
• Warehouse line costs — Non-QM lenders fund loans using warehouse lines before selling them. These lines ARE tied to short-term rates — so the Fed actually matters here. Higher Fed rates = higher carrying costs = higher rates for borrowers.
• Risk layering — Unlike agency loans with standardized pricing, non-QM rates adjust based on LTV, credit score, DSCR ratio, property type, loan purpose, and prepayment elections. A 1.25 DSCR on a single-family rental prices differently than a 1.0 DSCR on mixed-use with cash-out.
• Securitization market liquidity — When private-label MBS deals are flowing, lenders can sell efficiently and offer competitive rates. When that market freezes, rates spike.

DSCR and non-QM rates don't move in lockstep with conventional rates. You might see agency rates drop while non-QM holds steady — or vice versa. Different supply chain. Different buyers. Different weather.

What You Should Actually Be Watching

Stop refreshing the news for Fed announcements. Here's what actually moves the needle:

• 10-Year Treasury yield — The single best predictor of conventional mortgage rate direction
• MBS spreads — The gap between Treasury yields and mortgage rates; wider spreads = higher rates
• CPI and PCE inflation reports — Hot inflation = higher rates, period
• Jobs reports (NFP) — Strong employment signals economic strength and inflation risk
• Fed balance sheet runoff — As the Fed sheds MBS holdings, upward pressure on rates
• Private securitization activity — For non-QM, watch deal flow in the private-label market

What This Means for Borrowers and Brokers

If you're a borrower waiting for the Fed to "fix" mortgage rates, you might be waiting forever — or missing your window entirely. Rates move on economic data, inflation reports, and global events, often well before the Fed acts.

If you're a broker, this is exactly the kind of insight that separates you from the competition. Your clients are confused. The headlines don't help. When you can explain why rates are moving, you build trust — and trust closes deals.

Working with a lender who understands these dynamics matters. A lender plugged into the private markets can find better execution, move faster on locks, and structure deals to optimize pricing — things a traditional bank can't do.

The Bottom Line

The Fed doesn't set mortgage rates. The bond market does.

The Fed controls the thermostat. The bond market controls the weather. Stop watching the thermostat and start watching the sky.

For DSCR and non-QM, it's even more nuanced — private capital markets, warehouse costs, and deal-specific risk all determine your rate.

Watch the 10-Year Treasury. Follow MBS pricing. Pay attention to CPI and jobs data. That's where the real signals are.

Partner with New Century Mortgages

At New Century Mortgages, we live in this market every day. DSCR loans, bridge financing, asset-based lending — we know how these products actually price and move.

Ready to experience faster, smarter lending? Contact New Century Mortgages today.

DM me, email Jennifer@newcenturymortgages.com, or visit NewCenturyMortgages.com