How a War with Iran Could Impact Mortgage Rates

As tensions between the United States and Iran continue to escalate, many prospective homebuyers and current homeowners are wondering how a potential military conflict could affect mortgage rates. Understanding this relationship is crucial for making informed decisions about your home financing, whether you’re looking to purchase your first home, refinance your current mortgage, or invest in real estate.

The Initial Flight to Safety Effect

When geopolitical tensions spike, investors typically engage in what’s known as a “flight to safety.” During periods of uncertainty such as trade wars or political instability, investors flock towards safer securities, with U.S. Treasury bonds being the primary beneficiary of this behavior.

This flight to safety creates increased demand for Treasury bonds, which drives their prices higher and yields lower. Since mortgage rates are closely tied to the 10-year Treasury yield, this initial reaction typically leads to lower mortgage rates in the short term. Events in the Middle East tend to favor the bond market and the U.S. dollar, resulting in lower mortgage rates, though market dynamics in 2025 present some unique challenges.

Oil Prices: The Wild Card Factor

One of the most significant variables in any Iran conflict scenario is the impact on global oil markets. Iran is a major oil producer, and any military action could severely disrupt global energy supplies. A prolonged Israel-Iran conflict could push oil prices sharply higher, potentially prompting the Federal Reserve to either hasten rate cuts due to an economic slowdown or delay them to combat rising inflation.

This creates a complex scenario for mortgage rates. While higher oil prices could fuel inflation and pressure the Federal Reserve to keep rates elevated to combat rising prices, they could also trigger an economic slowdown that might prompt rate cuts. The direction mortgage rates ultimately move would depend on which effect dominates.

Federal Reserve Response and Policy Implications

The Federal Reserve’s response to a war with Iran would be critical in determining mortgage rate movements. The central bank would need to balance multiple competing factors: potential inflation from higher energy costs, economic uncertainty that could slow growth, and the need to maintain financial stability during a crisis.

If oil prices surge significantly due to supply disruptions, the Fed might prioritize fighting inflation over supporting economic growth, potentially keeping rates higher for longer. Conversely, if the conflict creates broader economic uncertainty and slows consumer spending and business investment, the Fed might pivot toward supporting growth through lower rates.

Market Volatility and Mortgage Pricing

War brings volatility, and volatile markets typically mean wider spreads between Treasury yields and mortgage rates. Lenders become more cautious during uncertain times, often adding extra margin to protect against increased risk. This means that even if Treasury yields fall during a flight to safety, mortgage rates might not drop as much as they historically would.

Additionally, if the conflict disrupts global financial markets, lenders might tighten their underwriting standards, making it harder for some borrowers to qualify for mortgages regardless of the rate environment.

Economic Growth Concerns

A prolonged military conflict with Iran could significantly impact U.S. economic growth through multiple channels. Higher energy costs would increase expenses for businesses and consumers, potentially reducing spending in other areas. Supply chain disruptions could affect various industries, while uncertainty could cause businesses to delay investments and hiring.

If these factors combine to slow economic growth significantly, the Federal Reserve would likely respond with rate cuts to stimulate the economy, which would eventually translate to lower mortgage rates. However, this scenario would also likely coincide with broader economic challenges that could affect employment and income stability for potential homebuyers.

Historical Context and Lessons

Looking at past geopolitical events provides some guidance, though each situation is unique. Historically, the fear of conflict tends to drive mortgage rates lower in the short term, but once reality sets in, rates may return to prior levels. The initial market reaction is often more dramatic than the longer-term impact, assuming the conflict doesn’t escalate into a broader regional war.

During previous Middle Eastern conflicts, mortgage rates have generally benefited from the initial flight to quality, but the longer-term effects have depended heavily on the duration of the conflict, its impact on oil markets, and the broader economic consequences.

What This Means for Your Mortgage Decisions

For prospective homebuyers, a potential Iran conflict creates both opportunities and challenges. If rates drop initially due to flight-to-safety flows, it could present a window to lock in favorable financing. However, you should also consider that lenders might tighten standards, potentially making qualification more difficult.

Current homeowners considering refinancing should monitor the situation closely. If rates fall significantly due to geopolitical tensions, it might present an opportunity to reduce monthly payments or access equity. However, be prepared for potential delays in processing as lenders navigate increased market volatility.

Investors should be particularly cautious, as commercial and investment property lending often tightens more quickly during uncertain times. The economics of rental properties could also be affected by broader economic impacts of a conflict.

The Bottom Line

While a war with Iran would likely initially drive mortgage rates lower through flight-to-safety flows, the longer-term impact would depend on numerous factors including oil price movements, Federal Reserve policy responses, and broader economic effects. The key is staying informed and working with experienced mortgage professionals who can help navigate the changing landscape and identify opportunities as they arise.

Given the complexity and unpredictability of how geopolitical events unfold, it’s important to focus on your personal financial situation and housing needs rather than trying to time the market perfectly. Whether rates move up or down, having stable income, good credit, and adequate savings will always be the foundation of successful homeownership.