How Oil, Debt, and Other Factors Affect Mortgage Rates

Just six years ago, the average mortgage rate was less than half of what it is today.

The average rate for a 30-year fixed-rate mortgage was just 2.67% on Dec. 31, 2020. Recently, the average rate exceeded 7% for the first time since 2000. 

Why are rates rising now? For the same reason as in 1981, when the average rate hit 18.53% – inflation. The U.S. inflation rate of 3.4% in August 2026 is well above the Federal Reserve Board’s target of 2%, but it’s also well below the 9% inflation rate of 2022.

When interest rates are low, consumers and businesses have more money to spend. That increases demand, causing prices to rise. Higher rates reduce demand, stabilizing prices.

Mortgage rates move in sync with 10-year Treasury yields. These 10-year Treasury yields have been rising because “the bond market believes inflation may remain elevated for a long time,” HUNT Mortgage Consultant Brian Thiel said.

What’s Causing Inflation?

Rising oil prices are the primary driver of inflation today. When the conflict with Iran began, oil was around $60 a barrel. Today, with the flow of oil through the Strait of Hormuz having slowed dramatically, the price has been close to $100 a barrel.

Other factors are also boosting inflation, including tariffs, government spending, and a shortage of cattle, but the price of oil is the biggest factor. The price of oil and petroleum-based products affects the price of almost everything, so it has a significant impact on the overall rate of inflation. It’s an impact we all feel.

Rising Federal Debt

While inflation is the top reason for rising mortgage rates, the rising federal debt also plays a role, according to HUNT Mortgage Loan Officer Sean Thiel.

“If you’re looking at where to invest your capital, the United States is leveraged and that affects risk,” he said. “Investors want a return for their risk, and that means higher interest rates.”

The federal debt now exceeds $40 trillion. The cost of “servicing the debt” – which is like paying the minimum on a credit card – will exceed $1 trillion this year and is projected to exceed $2 trillion by 2036, according to the Congressional Budget Office. Printing more money to keep up would only exacerbate inflation.

The Fed’s Role

While mortgage rates are not directly affected by the actions of the Federal Reserve Board, expectations about what the Fed will do influence the bond market, which drives mortgage rates.

Until recently, the Fed was expected to decrease interest rates this year. Instead, the Fed increased the federal funds rate by 0.25% at its most recent meeting.

What to Do Today

Potential homebuyers waiting for rates to come down have instead seen them go up. Meanwhile, the price of housing continues to rise in most markets. Waiting is pricing some people out of the market and raising the cost of homeownership for all would-be buyers.

“Getting the house is the most important piece,” Sean Thiel said. “Chances are, housing will cost more a year from now, and more than that two years from now. When people wait for home prices to come down, they’ll keep waiting. And prices will go up.”

He believes it’s better to buy now. Rates may continue to rise, but eventually they will fall, and you can always refinance when they do.