I get that the fed funds rate influences mortgages: it goes up so do mortgage rates. But can anyone explain why there is such a high difference between fed funds (I believe it’s 1% now) vs mortgages (5-6%)? I know also that banks apply all sorts of premiums (default, market risk…) but why are they that high?
As a comparison, mortgage rates in the EU are still sub-2% with ECB rates at zero.
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The big difference is mortgage rates are for 15 or 20 or 30 years, while the fed funds rates are much shorter term. If you’re lending money out for 30 years, and you can borrow at 1%, but you worry that tomorrow you might have to borrow at 4% or 5%, then you’re not very likely to lend money out at 2 or 3%.
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