Understanding mortgage rates is not too difficult. In essence, the longer the mortgage term, the higher the interest rate. The reason for this is due to the uncertainty of the future. Apparently lenders have a better feeling for where the overall economy, and required rate of return on investments, will be in 15 years vs. what those criteria will be in 40 years.
For example, a 40-year fixed loan might have an interest rate of 7.75%, and a 15-year mortgage will carry a 6.25% interest rate. The lender requires a higher rate of return on the money loaned out for the longer term since there is more uncertainty in the economy and the borrower’s ability to pay the loan.
Many people have the misconception that the Federal Funds Rate has anything to do with mortgage rates. When the Federal Reserve cuts rates, it is the rate that it charges banks to borrow money overnight. The idea is to get banks to be able to borrow more, and in turn, lend more. (Banks also have borrowing limits just as individuals do – lower interest rates mean lower required payments back to the Fed and therefore increases a banks borrowing capacity).
A better predictor of mortgage rates would be the 15, 20, and 30 year bond rates – read more about it here.