Better mortgage spreads lead to the lowest rates of 2025

Today, we had another new low in mortgage rates. It was nothing too drastic, just a 0.2% drop from 6.57% to 6.55%, but it’s on a day that the 10-year yield is currently flat to higher, which means mortgage spreads made the difference today. Just like in 2024, mortgage spreads don’t always get the recognition they deserve. So, I thought I would show why it’s so crucial that the mortgage spreads have gotten better.

Mortgage spreads

Every weekend, I track the spreads using the weekly 30-year mortgage rates. The spreads can be a different number, depending on who you quote for the 30-year fixed, since it’s the difference between the 30-year fixed and the 10-year yield. For my purposes, I use the Freddie Mac mortgage market survey.
The improvement in mortgage spreads in 2025 has been a blessing for housing, as demand would have been worse if mortgage spreads hadn’t improved since the worst levels of 2023. And, with more rate cuts and a dovish tone from the Fed, the spreads can slowly improve over time. For this year I was looking for a 0.27%-0.41% improvement, working from a 2.54% average in 2024. As of last Friday, we are at 2.34%.

If the spreads were as bad today as they were at the peak of 2023, mortgage rates would currently be 0.77% higher. Conversely, if the spreads returned to their normal range, mortgage rates would be 0.53%-0.73% lower than today’s level. Historically, mortgage spreads have ranged between 1.60% and 1.80%.

The best levels of normal spreads would mean mortgage rates at 5.90%-6.10% today, a notable difference.

History of the spreads

Below is a summary of the spreads over the last 10 years. After February 2022, the spreads significantly deviated from the historical norm, resulting in elevated mortgage rates due to both the increase in rates that year and the widening spreads. Following the Silicon Valley banking crisis, the spreads reached a cycle high of 3.10%.

The history of the spreads shows that they tend to become more volatile with each economic cycle. There was a notion that spreads would not improve after 2023 unless the Federal Reserve resumed buying mortgage-backed securities. However, this is not how spreads have behaved over the decades, which suggests a lack of experience in understanding them. Below is a long-term view of the spreads, and it’s noteworthy that they nearly reached 6% in 1981.

Conclusion

It’s very important that the mortgage spreads improved in 2024 and 2025. For example, when mortgage rates got to 6% in 2023, the 10-year yield was at 3.37% and in 2024, to get near 6%, the 10-year yield had to get toward 3.65%. As mortgage spreads improve, we can have near 6% mortgage rates without the 10-year yield getting toward 3.37% or 3.65%. If we had a normal spread today, we would already be below 6% right now. Any more improvement in 2025 and a lower 10-year yield can get us toward 6% — a key level for housing demand that I wrote about here.