Podcast Summary: How Mortgage Rates Work

Business School with Sharran Srivatsaa
Host: Sharran Srivatsaa
Episode Date: November 4, 2025

Episode Overview

In this episode, Sharran Srivatsaa breaks down the mechanics behind mortgage rates, explaining why they remain high despite recent Federal Reserve rate cuts. Designed for all listeners—whether homeowners, renters, potential investors, or seasoned operators—the episode aims to demystify how mortgage rates are set, the key economic forces involved, and practical strategies for navigating the current environment. The core message: understanding mortgage rates is critical for anyone seeking to make sound financial decisions and gauge the broader U.S. economic outlook.

Key Discussion Points & Insights

1. Why Every Adult Needs to Understand Mortgages

• [01:16] Sharran emphasizes that mortgages impact everyone:
  • “Every single adult needs to understand how mortgages work. Whether you’re ever going to use one, get one, or invest in one, every single adult needs to understand how mortgages work. And it’s super important.”
• The status of the mortgage market is a bellwether for the U.S. economy and consumer confidence.

2. Federal Reserve Rate Cuts vs. Mortgage Rates

• Background: In 2025, the Fed cut rates three to four times, with inflation cooling from 9% to under 3%.
• Core Question: Why are mortgage rates above 6% despite these moves?
• Explanation:
  • The Fed funds rate is the overnight interbank lending rate, causing direct and immediate effects on short-term loans (e.g., credit cards, car loans, business lines of credit).
  • Mortgages, as long-term loans (15–30 years), are not directly tied to the Fed funds rate. Unlike short-term loans, their interest rates are set differently.

3. How Mortgage Rates Are Actually Determined

• Tied to the 10-Year Treasury:
  • Mortgage lenders benchmark long-term rates off the U.S. 10-year Treasury yield.
    • “The 10-year seems like the closest instrument that people can kind of benchmark to. As I’m recording this…the 10-year treasury is yielding somewhere in the 4.2%-ish range, but mortgage rates are sitting above 6%. And the difference between those two numbers is called a spread.” [04:02]
• The Spread:
  • In normal times, the spread (lender’s markup) is about 1.5–2.0 percentage points.
  • Currently, the spread is near 3 percentage points due to greater uncertainty and risk aversion.
  • Analogy:
    • “If you take a restaurant…a restaurant buys ingredients at a wholesale price…and then it charges you retail price. Mortgage companies do the exact same thing.” [04:40]

4. Three Key Reasons Why Mortgage Rates Are Still High

[06:30]

• 1. Persistent Inflation

  • Inflation may appear cooled overall, but not everywhere: rents, insurance, healthcare, and childcare are all climbing.
    • “Inflation hasn’t cooled off everywhere…childcare and healthcare costs are rising pretty fast, much faster than wages…”
  • Lenders shield themselves from future inflation risk by maintaining higher spreads.

• 2. The Fed Stopped Buying Mortgage-Backed Securities

  • During COVID, the Fed acted as a major buyer, lowering market risk and spreads. Now, private investors dominate—and demand higher returns for the same risk.

• 3. Uncertainty and Investor Nerves

  • “Nobody likes uncertainty. Uncertainty makes investors super nervous.”
  • Global tensions (wars, politics), market volatility, housing imbalances, and technological disruption (e.g., AI bubble) all heighten risk perceptions.
  • “When things feel risky, everything gets expensive. That’s it.” [08:40]

5. Risk, Volatility, and Their Upshot

• Risk Premiums:
  • When trust is high and risk is low, lenders can accept low returns. But “if somebody else, who I never knew…wanted to borrow a hundred dollars from me, I would think that’s risky. I would ask for a higher interest rate. I would ask for collateral…That uncertainty makes investors nervous.” [09:27]
• Result: Until risk eases (via lower inflation, Fed clarity, and improved investor sentiment), mortgage rates are likely to stay high.

6. Historical Perspective

• Current (~6.3–6.4%) rates feel high compared to COVID-era lows but are:
  • Below the 50-year average (7–8%)
  • Far below the record ~18% rates of the early 1980s
• “We are below historical averages. So if you want to lock something in, you should consider doing that.” [10:50]

7. Strategic Advice for Buyers and Refinancers

[11:15]

• Don’t Wait for 3% Rates to Return:
  • “We are not waiting for rates to get to 3%. We’re just getting the right deals.”
• For Buyers:
  • Adjust your budget or look in different neighborhoods.
  • “You’re not buying a home; you’re buying a monthly payment.”
• For Refinancers:
  • Wait for a drop that makes refinancing net positive (after closing costs), but don’t chase the absolute bottom.
• Big Picture:
  • The market you are in is the one you’ve got; don’t put life decisions on hold hoping for radical changes.

8. Investor Perspective

• Sharran shares his approach:
  • Planning to buy ~$500M in real estate over the next 18 months; focused on cash flow and debt coverage, not chasing rate lows.

Notable Quotes & Memorable Moments

• [01:16]:
  • “Every single adult needs to understand how mortgages work.” — Sharran Srivatsaa
• [04:40]:
  • “Mortgage companies do the exact same thing [as restaurants]. They borrow at Treasury rates if possible, then they charge you more to cover their costs and their risks and their profit.”
• [06:30]:
  • “Three things are keeping mortgage rates high. Number one, inflation… Number two, the Federal Reserve stopped buying mortgage backed securities… Number three, nobody likes uncertainty.”
• [08:40]:
  • “When things feel risky, everything gets expensive. That’s it.”
• [09:45]:
  • “If there’s just uncertainty…The more uncertainty there is in the world, the more volatility there is…and the more risk they take, which means more cost for you and me.”
• [10:50]:
  • “We are below historical averages. So if you want to lock something in, you should consider doing that.”
• [11:56]:
  • “You’re not buying a home, you’re buying a monthly payment.”
• [12:30]:
  • “The market you are in is the market you’ve got…At the end of the day, you’ve got to live life the way you want.”

Important Timestamps

| Time | Segment/Highlight | |--------|-------------------------------------------------------------------------| | 01:16 | Sharran establishes the universal importance of understanding mortgages | | 04:02 | Explanation: Mortgage rates vs. 10-year treasury, the meaning of “spread"| | 06:30 | The three main reasons mortgage rates stay high | | 08:40 | Core maxim: “When things feel risky, everything gets expensive” | | 09:27 | Analogy: How risk and trust change the price of borrowing | | 10:50 | Historical rate context and present opportunity | | 11:15 | Action steps for buyers and refinancers | | 12:30 | Advice for living with today's market |

Actionable Takeaways

• Understand the Environment: Don’t be fooled by Fed rate headlines; mortgage rates are set by broader, long-term market forces.
• Make Decisions Based on Today’s Reality: Stop fixating on the “good old days” of 3% mortgages. If you find a deal that works for you now, consider moving forward.
• Think in Terms of Cash Flow: Whether an individual or an investor, focus on the monthly payment—and whether your budget reliably covers it.
• Expect Gradual Change: Only a sustained drop in inflation, more policy clarity from the Fed, and a calmer global landscape will bring materially lower rates.

Final Words

Sharran’s no-nonsense, approachable style makes complex financial concepts easy to grasp. His practical, "play-the-hand-you’re-dealt" advice resonates whether you’re figuring out your first mortgage or overseeing a real estate portfolio.
“You’re not buying a home; you’re buying a monthly payment.” [11:56]

For more resources and tactical frameworks, visit Sharran.com or subscribe to his Substack, “My Next Billion.”