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Mortgage rates are the single most important financial metric you must know as an adult. Why? Because if you don’t understand them, you can’t truly forecast the overall health of the economy or how consumers feel about spending, saving, and investing.
In this episode, Sharran breaks down the fundamentals of mortgage rates and why they matter far beyond real estate. He explains what a mortgage actually is, how interest rates are calculated, and the three biggest factors keeping rates higher than expected.
He also shares practical insights for anyone looking to buy a home right now, as well as what smart buyers can do to navigate today’s tough lending environment.
Whether you’re a homeowner, investor, or just trying to understand the financial landscape, this episode will help you see how mortgage rates shape everything–from housing demand to economic confidence.
Tune in now to learn how mortgage rates really work and what they reveal about the future of the economy.
“When things feel risky, everything gets expensive.”
– Sharran Srivatsaa
Timestamps:
01:44 – Why mortgage rates are at their current level
03:03 – What is a mortgage?
03:14 – How mortgage rates are calculated
05:26 – 3 Things that keep mortgage rates high
09:52 – What to do if you want to buy a house now
Resources:
– The Next Billion by Sharran Srivatsaa
– Board Member: ARC Multifamily Real Estate Investing
– Board Member: The Real Brokerage
Connect with Sharran:
– X
– YouTube
– Threads
Transcript:
[00:00:00] Hey, this is Sharran Srivatsaa. Welcome back to the Business School Podcast. And in this episode, I’m going to explain to you how mortgages work. Now, it doesn’t matter whether you own a home, whether you rent, whether you want to buy an investment property, or whether you have way too much money. This is the single most important financial metric that you need to understand as an adult because it is the underlying financial instrument that drives.
[00:00:22] America. And if you don’t know this, then you can’t really forecast and see the overall health of the economy and how consumers feel. So you have to understand how mortgages work. And I’m gonna break it down step by step, starting right now.
[00:00:42] One thing is for certain, just because it’s tried and true doesn’t mean it’s working right now. So the big question is this. Where can you learn what is working right now? The strategies, the tactics, the psychology, and the exact how to, how to grow your business, how to blow up your personal brand and supercharge your personal growth.
[00:01:04] That is the question. And this podcast will give you the answer. My name is Sharran Srivatsaa, and Welcome to Business School.
[00:01:16] Okay. We’ve established the fact that 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. But as I record this, in October, 2025, the Federal Reserve has cut rates three to almost four times this year.
[00:01:33] Some stats around inflation has. Supposedly kind of cooled from an Oppenheim 9% to under 3%, which is the entire job of the Fed’s mandate to manage inflation. But if that all that has happened, why are our mortgage rates still above six-ish percent? And let me tell you why. Number one, the Federal Reserve controls something called a Fed Funds rate.
[00:01:53] That is the interest rate. That banks charge each other for overnight loans, and what that means is banks have a system of creating liquidity with each other and so that all the cash is not stockpiled in one place, so they’re able to borrow from each other in a semi risk free kind of environment where there’s this pool of joint stockpile of assets, and that is called the overnight lending rate.
[00:02:14] When the Fed cuts this rate, it makes a short-term borrowing cheaper. So if I can start a bank and go to my fellow bank and borrow at 1% and then lend it out at 4%, that’s good. But if I have to go to my fellow bank and borrow at 8%, I can’t lend it out at 12. So the lower the cost of the banks to borrow from each other, the more liquidity there is in the economy and make short-term borrowing cheaper, this immediately impacts what.
[00:02:38] It immediately impacts credit cards, car loans, and business lines of credit. And because all of those are instantly tied to this short term rate, mortgages don’t work that way. That’s why the Federal Reserve, as they control the Fed funds rate, or the overnight borrowing rate, since it applies to direct consumer-based things like credit cards and car loans and business lines of credit, it doesn’t apply to mortgages directly.
[00:03:00] So let’s talk about how mortgage rates actually work. Just to frame this for you, what is a mortgage? A mortgage is generally a long-term loan, and long-term loans are not tied to short-term rates, right? So you’re borrowing money for 15 or 30 years. And these mortgage lenders, they don’t. Price. These loans based on what happens in their overnight rate, you’re not getting a long-term rate for short-term rates.
[00:03:27] It’s like there’s a rate mismatch comparing apples and oranges. Well, that’s what the world doesn’t know, but there is a benchmark for how these long-term rates are priced and they’re priced based on the U.S. treasury, and that is the 10-year treasury bill. That is the benchmark for where investors think the economy is gonna be headed over the next decade, because most of the times people don’t hold that.
[00:03:44] Note for more than 10 years and they, you know, get out of it, et cetera. So the 10-year seems like the closest instrument that people can kind of benchmark to as I’m recording this video right now, the 10-year treasury is yielding somewhere in the 4.2-ish percent range, but mortgage rates are sitting above 6%.
[00:03:58] And the difference between those two numbers is called a spread, not like Nutella or Mayo or anything like that. It’s called a spread. And essentially what the spread is, is there is a markup, right? The markup between what that rate is and what you get offered as a mortgage. For example, if you take a restaurant, let’s say a restaurant buys ingredients at like a wholesale price, right?
[00:04:17] And then it charges you retail price. A restaurant buys a bottle of wine for $40, and Jen it charges you $150. That is a markup. The difference is what? The difference covers their rent and their labor, and the risk of spoilage and the wine going bad, and their overall profit. Mortgage companies do the exact same thing.
[00:04:33] They borrow at treasury rates, if possible. Then they charge you more to cover their costs and their risks and their profit. In normal times, by the way, that markup runs about 1.52 percentage points right now, that markup is close to three percentage points and that extra cushion is actually costing you more money.
[00:04:51] That is why the rates are higher. Now, let me give you a very specific example of the broader reasons why that are like keeping mortgage rates high, and just for your awareness to understand what it is. That way when you see an article, you’ll be able to know how the economy’s working and how it kind of impacts you.
[00:05:07] You don’t have to memorize this. Just listen to me for the next two, three minutes. That way when you hear the CNBC narrative or you read a piece of news or you get a tweet or someone says something, it has a lot of context and you know exactly where the pieces fit. I know you’re not gonna turn around and do a lecture on this.
[00:05:22] My goal is for you to have just enough broad awareness to know the key pieces of the puzzle. Alright, three things that are keeping. So mortgage rate, tide number one. Inflation is a really important thing. Inflation has not cooled everywhere. Give you an example. Rent is still climbing in most major cities, insurance costs are in double digits.
[00:05:38] Childcare and healthcare costs are rising pretty fast, much faster than wages. And these mortgage lenders are seeing those numbers and they worry that inflation could accelerate again. So what they’re doing is they’re charging more to protect themselves. If it has not hit them, they’re just saying, Hey, this may be coming for us too, so we’re just gonna protect ourselves.
[00:05:55] Right? So inflation hasn’t cooled off everywhere, so it’s not homogenous, if you will. Number two, the Federal Reserve stopped buying mortgage-backed securities. Now, what this means is that, for example, during the pandemic, the Fed was the largest buyer in the market. And now when you have a ready buyer, right, when you have a ready buyer for stuff that kept the markup artificially low, because all the mortgage lenders were like, wait a minute, I can always get rid of my loans whenever I want.
[00:06:18] Therefore, I don’t have any risk associated with it. So the markup was already low. Now. Private investors are doing more of that, and the private investors want more of a profit. They want a higher return on the same risk, so they’re like, Hey, I want a bigger spread on this. So a lot of people are cutting into the profit here.
[00:06:34] And here’s number three. Nobody likes uncertainty. Uncertainty makes investors super nervous. We live in unprecedented times where we have wild things going on in the world. Like we have geopolitical tensions like wars. We have, you know, government debt concerns. We have gold at an all time high. We have Bitcoin, which is liquid gold.
[00:06:51] That’s. Going crazy. We have uneven housing markets that are volatile. We have homes in some markets that are sitting and not selling. We have homes in other markets that are flying off the shelves. We have affordability in the all-time worst position. We have renters that think that they’re only gonna rent forever.
[00:07:05] And when investors feel uncertain, what do they do? They just demand more money because they feel it’s risky. And when they demand more money, everybody has to pay more. Here’s the foundational thing that you have to learn. When things feel risky, everything gets expensive. That’s it. When things feel risky, everything gets expensive.
[00:07:23] The reason is, if there’s no risk, like if you were my friend, right, and I trusted you, and I knew that you were good for your word, and I gave you a hundred dollars as a loan, well, I might charge you 1% interest if I want it just as a nominal fee because I know you’re good for it and I have the trust in you.
[00:07:40] So there’s trust, right? But. Somebody else who I never, who I’ve never met, wanted to borrow a hundred dollars from me. I would think twice. I would think that’s risky. I would do a background check. I would ask for a higher interest rate. I would ask for collateral. What does that mean? I’m uncertain.
[00:07:55] Therefore, I’m nervous. Therefore, I ask for more. Payment for the [00:08:00] risk that I’m taking. And since that payment is not 1%, it may be 7, 8, 10, 12%, that has to be passed on to be to someone else, and that uncertainty makes investors nervous very, very simply. The more uncertainty there is in the world, the more expensive everything else is going to get.
[00:08:14] It doesn’t even matter if it’s true. If there’s just uncertainty. When I say uncertainty, I just mean like a bunch of random things are happening. People think there’s an AI bubble, there’s a bunch of wars, there’s a bunch of politics. You have strikes, you have local government issues. You have big companies that are festering.
[00:08:30] You have Wall Street that posted bad earnings. You have, you know, a bunch of natural disasters. You have fires somewhere. There’s all real relates to uncertainty. The more uncertainty is there in the world. The more volatility there is and the more volatility there is, it just means that investors want more for the risk that they’re taking and the more risk they take, which means more cost for you and me.
[00:08:49] That’s all you need to understand, which I mean is rates are not coming down anytime soon until three things happen. Number one, inflation settles down. Number two, that the Fed provides clearer kind of support for what’s gonna happen next. And the most importantly, the investors feel safer about the future, and all three of them need to happen.
[00:09:04] None of these exist today. I’m sorry. Even the most optimistic forecast, only see mortgages dipping below 6% in late 2026. Not the Fed’s funds rate, not the fed cutting rates. It doesn’t matter if the Fed has to cut rates. What happens to the risk of the for mortgages? That’s what we’re talking about. I’ll give you like crazy context.
[00:09:22] Today’s 30-year mortgage rates are around 6.3, 6.4%. That feels pretty high compared to like the three-ish percent that we saw during COVID, but I just want you to keep it in perspective that 50-year historical averages is roughly like seven to 8%. So we’re still below historical averages. And remember, I will tell you, in the early 1980s, the mortgage rates were like 18%.
[00:09:41] Now I’m not saying, hey, compared to the worst times, we are cheaper Right now, I’m just saying we are below historical averages. So. If you wanna lock something in, you should consider doing that. Which brings me to my last question here. What should you do if you want to buy a home? I will tell you this, the lesson is not to wait for rates to return to 3%.
[00:09:59] I’m not a financial advisor. I’m a professional investor. I invest a lot. I am right now buying a ton of real estate. Like over the next 18 months, me and my partners will probably buy close to $500 million worth of real estate. In the next three years, we will own a billion dollars worth of real estate.
[00:10:15] And what I mean by that is we take on a lot of loans. We are not waiting for rates to get to 3%. We’re just getting the right deals. If I’m going to put loans. For close to $500 million worth of real estate. Now, it, that may not be a lot for you. That I think is, is a lot of, is a lot of real estate. What I’m suggesting is that the rates are not gonna go anywhere near 3%.
[00:10:34] Now, that is not the world that we live in, and I will bet you dollars to donuts. That does not happen anytime soon. So the lesson I would offer is to make decisions in a world that we live in right now. What decision can you make right now? So I’ll give you two. Number one, if you are buying, I would adjust your budget, or I would look in different neighborhoods.
[00:10:52] You know, I always tell people, you’re not buying a home. You’re buying a monthly payment, right? You’re not buying a home, you’re buying a monthly payment. If that means, if that is true, you gotta adjust your budget, or you look in different neighborhoods because you may be able to get what you want a little farther away, and that is the choice that you have to make because you’re not buying a home, you’re buying a monthly payment.
[00:11:09] Number two, if you’re refinancing, I would wait for another half point drop or whatever than holding out for the bottom. I would get to the point where it still makes sense. You’re able to cover closing costs and things like that, and you still have a net-net better monthly payment. As long as you can do that in a net net economics kind of way, you should go ahead and consider refinancing.
[00:11:26] But remember, it’s not about buying a home, it’s about buying a monthly payment. All I will tell you is this, the market you are in is the market you’ve got right. Thinking that it’s gonna go lower, thinking that it’s gonna go higher, et cetera, is interesting. But at the end of the day, you gotta live life the way you want.
[00:11:41] I always think about, it’s not about buying a home, it’s about a monthly payment. The $500 million. With the real estate that we’re gonna buy in the next two and a half years, we are not worried about the rate. We’re just ensuring that our net operating income on all our properties, the monthly payments are easily covered.
[00:11:55] We call it debt coverage ratio are easily covered based on what we’re trying to do. If we do that, we win overall. I wanted to give you this just as a primer to understand, you know, kind of like the real reason why our mortgage rate is not falling. Just because you see the fed cut rates does not mean your rate’s gonna fall, but you also need to know that everything is gonna be based on your monthly payment.
[00:12:13] So, wanted to give you enough of a sense of understanding this. By the way, if you like this, can you do me a favor? Can you screenshot this and tag me? That way I can make more like this for you. If you are in the real estate business and you feel like your clients need to hear something that is not.
[00:12:25] Always put out by you. That is not a technical piece of literature, and you think this will help them. Please send this to them. I don’t make any money off of any of this. I have nothing to sell you. I have nothing for them to buy. I do this every day and I thought that this is one of the biggest questions I get asked and, uh, wanted to make this for everybody as a public service announcement.
[00:12:42] So if you like this, can you do me a favor? Can you screenshot this and tag me That way I can make more like this for you.
[00:12:55] Hey, this is Sharran. I have an awesome free gift for you just for listening to the podcast. As you may know, I’ve got a chance to build $2 billion companies the hard way. So if you like this episode, you’ll love getting the exact playbooks from those wins. It’s on my Substack, called My Next Billion. It has the exact frameworks I wish someone had given me when I was figuring it all out. Now you get the real lessons from the trenches as I go for a three-peat and build the next billion. So everything’s free at mynextbillion.com. Please check it out at mynextbillion.com.