While millions of Americans eagerly wait for mortgage rates to fall, there’s a growing body of evidence suggesting rates might actually go up. Why? An escalating debt crisis that’s forcing the U.S. government to pay more to borrow money – and that cost inevitably trickles down to your home loan.
Everyone wants to go back to the days when interest rates were only 3%, but most people realize that’s a pipe dream, and would be happy with a loan for 5%. So they wait, and wait. But it’s been years and guess what? Rates still haven’t gone down. Why?
The Simple Connection: Government Bonds Drive Mortgage Rates
Before diving into why rates might rise, let’s back up a bit because it’s important to understand how mortgage rates are actually determined.
The US government mainly generates revenue (makes money) by collecting taxes. But it also needs to borrow money to pay for things as well. Just like many individuals need to borrow money to buy homes.
It borrows money by selling bonds-essentially an IOU. People (and countries) buy these bonds and lend money to the US government. The US government then promises to repay this money/loan and will pay a certain interest rate as a thank you.
These bonds have different maturity dates. Some people lend the US government money and buy their bonds for only 2 years. Others for 5 years. 10 years, 20 years, 30 years etc…The most relevant length is for 10 years. This 10 yr US treasury rate is essentially the rate that most closely determines the interest rates charged to a people by mortgage lenders.
If the US government were a person who was spending way too much money on things and taking on debt, wouldn’t you charge them a higher interest rate if they wanted to borrow money from you?
The Debt Crisis Nobody Wants to Talk About
The foundation of America’s borrowing advantage has been shaken. Moody’s Ratings (which is basically like Experian or Transunion for the the government) recently downgraded the US credit rating. Their reason? The growing burden of financing the federal government’s budget deficit and the rising cost of servicing (paying back) that debt.
This downgrade, which occurred in May 2025, marked a historic moment – the U.S. lost its last perfect credit rating from a major rating agency. The implications extend far beyond political headlines.
The immediate market reaction to the credit downgrade was telling. During Monday’s trading session, the yield on the benchmark 10-year Treasury bond peaked at 4.56% before declining to about 4.45%. Even more concerning, U.S. Treasury yields spiked on Monday after Moody’s downgraded the U.S.’ credit rating, citing fiscal concerns.
The numbers behind the downgrade are staggering. Annual deficits would jump from $1.8 trillion in 2024 to $2.9 trillion by 2034 as the federal government would continue to spend more than it would raise in revenue, the committee projected. This isn’t just a future problem – it’s affecting borrowing costs right now.
Bond Markets Are Already Demanding Higher Returns
The bond market, often called the “smart money,” is already reacting to these fiscal concerns. Remember, the US government needs to borrow money, by issuing bonds/IOUs. It periodically holds auctions to sell these bonds.
The U.S. Treasury Department saw soft demand for a $16 billion sale of 20-year bonds last Wednesday with investors worried about the country’s increasing debt burden as Congress wrangles with a tax and spending bill that is expected to worsen the fiscal outlook.
When bond auctions show weak demand, it forces the Treasury to offer higher yields to attract buyers. Higher Treasury yields directly translate to higher mortgage rates for consumers.
The Flight to Alternative Assets
Perhaps the most telling sign of concern about the dollar’s stability is the performance of traditional hedges. Have you ever heard of the term “hedging your bets?” Its basically like insurance. Maybe you believe in something, like the US dollar/US government. You make money in order to accumulate dollars.
But what if the dollars you accumulate become more worthless over time because people start to lose confidence in the dollar? You start to by other scarce assets that you think will hold their value over time like gold, silver, bitcoin, platinum etc…
Gold and Bitcoin have been setting record highs throughout 2024 and early 2025, suggesting investors are seeking alternatives to dollar-denominated assets.
This flight from dollar assets puts additional pressure on Treasury bonds, as foreign and domestic investors diversify away from U.S. debt.
Why This Time Might Be Different
Several factors make the current situation particularly concerning for future interest rates:
The Interest Rate Trap: The government now faces higher borrowing costs on both new debt and when rolling over existing debt. With over $27 trillion in total debt, even small increases in borrowing costs translate to hundreds of billions in additional annual interest payments.
Foreign Buyer Fatigue: Foreign governments and central banks have been among the largest buyers of U.S. Treasuries, but their appetite for US debt/treasuries/bonds has been diminishing as they diversify their reserves and reduce dollar exposure.
Demographics and Spending: An aging population means automatic increases in Social Security and Medicare spending, making deficit reduction politically and practically challenging. In simple terms, it’s political suicide if someone tries to come out and tell old people(who vote in droves) that we will be reducing their Medicare, Medicaid, Social security and other benefits.
The House just passed a Reconciliation Bill that will add trillions more to the deficit. The US government just can’t stop spending money it doesn’t have! Some people think it’s nearly impossible to cut the budget and reduce our debt by cutting military spending. The budget for the Defense Spending just keeps on going up.
So the two areas where the US government spends the most money, Healthcare and Defense, will keep seeing increases in spending, with no end in sight.
Now do you understand why some people are worried about the growing US debt problem? How do they express that worry? They demand higher interest rates if they’re going to keep lending money to the US government. Those higher rates for the government, mean higher rates for you, the consumer.
What This Means for Your Home Purchase
For prospective homebuyers, this means:
- Don’t Wait for Dramatic Rate Drops: The structural factors supporting higher rates may persist longer than many expect. That said, if you can’t afford to make a home purchase now, then don’t. Seriously. Keep saving.
- Focus on What You Can Control: Rather than timing the market, focus on improving your credit score, saving for a larger down payment, and shopping around for the best available rates.
- Consider Rate Lock Strategies: If you find a reasonable rate, locking it in might be wiser than gambling on future decreases.
The Bigger Picture
The relationship between government fiscal health and mortgage rates highlights how interconnected our financial system truly is. When the government struggles to manage its finances affordably, those costs don’t remain isolated in Washington – they flow through to every American trying to buy a home.
While predicting interest rates with certainty is impossible, the fundamental pressures from mounting debt, credit downgrades, and weak bond demand suggest that the era of ultra-low mortgage rates may be ending.
The bond market’s message is clear: lending money to the U.S. government – and by extension, U.S. borrowers – is becoming more expensive.
For now, the smart money appears to be betting on higher rates, not lower ones. Until the underlying issues with our out of control spending are addressed, mortgage rates may have more room to rise than fall.
The dreams of 3% mortgage rates may need to be replaced with the reality of a new, higher rate environment. It’s time to adjust to the new normal.
Gideon is a licensed real estate agent. He he holds an undergraduate degree from Northwestern University and an MBA from New York University.
He’s passionate about business, real estate, digital marketing and making sure that black people increase our collective net worth.
License #:10401336627