As we look ahead to 2025, many homebuyers and homeowners wonder what will happen to mortgage interest rates. With the economy constantly changing, factors like inflation, employment rates, and the actions of the Federal Reserve all play a role in shaping these rates.
In this blog, our mortgage pros break down what experts predict for mortgage rates in the coming year and what that means if you’re considering buying a home or refinancing your mortgage.
Current Mortgage Interest Trends
To understand where mortgage rates are going in 2025, it will help to review where they are now. Interestingly, as of publishing this blog post, Freddie Mac reports that the average mortgage interest rate for 30-year fixed-rate loans is the lowest it has been since 2022.
However, a Bankrate survey revealed that 47% of homeowners want to wait until interest rates are below 5% to buy a home. Can we expect them to drop even further?
Are Mortgage Rates Going Up or Down in 2025?
That’s a loaded question! The short answer is: possibly. Experts from Fannie Mae, Wells Fargo, and the Mortgage Bankers Association predict that 30-year fixed mortgage rates will range from 5.9% to 6.2% by the end of 2025. Even with this decrease, though, rates will likely stay higher than they were before the pandemic.
Top 5 Factors Affecting Mortgage Rates Today
While these mortgage rate predictions for 2025 seem promising, many factors are at play. Let’s discuss five key elements impacting mortgage interest rates across the U.S. today:
The Federal Reserve
Inflation
The economy
The unemployment rate
The housing market
1. The Federal Reserve
How does the Federal Reserve affect mortgage rates? The Federal Reserve doesn't directly set mortgage interest rates, but its actions can still have a big impact. The Fed controls the federal funds rate, or the rate banks charge each other for overnight loans.
When the Federal Reserve raises this rate, borrowing costs across the economy increase, including for mortgages, usually leading to higher mortgage interest rates. On the other hand, when the Fed lowers the federal funds rate, borrowing becomes cheaper, often resulting in lower mortgage rates.
What is the Federal Reserve doing right now? On September 18th, 2024, the Federal Reserve cut its main interest rate by 0.5%, the first cut in over four years and the largest since 2008. The Fed is making this move to help the job market and boost economic growth while paying less attention to inflation.
2. Inflation
How does inflation affect mortgage rates? The Federal Reserve often raises interest rates to control inflation. Higher inflation reduces the purchasing power of money, so lenders raise mortgage rates to compensate for the loss in value over time. When inflation is high, mortgage rates usually go up, and when inflation slows down, mortgage rates can decrease, making borrowing cheaper for homebuyers.
What is inflation like right now? Inflation in the U.S. has been slowing down, with the annual inflation rate at 2.5%, the lowest in three years. Prices increased by 0.2% in August, continuing this trend of cooling inflation. Overall, inflation is getting closer to the Fed's goal of 2%. As a result, the Federal Reserve has started lowering interest rates to keep the economy stable while controlling price increases.
3. The Economy
How does the economy affect mortgage rates? When the economy is strong and growing, people have more money to spend, and demand for homes increases. Lenders often raise mortgage rates in response to this higher demand. Conversely, mortgage rates tend to drop in a slowing economy to encourage borrowing and stimulate spending.
What is the economy like right now? As of September 2024, the U.S. economy is showing mixed results. Growth is steady but not very strong, and inflation has improved.
In other words, people are still spending money, but high interest rates and a slower housing market have affected confidence. While jobs are still plentiful, wage increases have slowed down. Although the economy isn't struggling, higher interest rates and global concerns keep experts cautious.
4. The Unemployment Rate
How does the unemployment rate affect mortgage rates? High unemployment signals a weaker economy, which can lead to lower mortgage rates to encourage homebuying. In contrast, low unemployment usually aligns with higher mortgage rates because the economy is stronger.
What is the unemployment rate like right now? The U.S. unemployment rate is about 3.8%, slightly higher than earlier this year. The economy has slowed due to rising interest rates meant to control inflation. Even though jobs are still available, changes in monetary policy are gradually impacting employment.
5. The Housing Market
How does the housing market affect mortgage rates? The housing market affects mortgage rates in a few ways:
Supply and Demand: If many people want to buy homes without enough available, mortgage rates can increase. If fewer people are buying, rates often go down to encourage sales.
Home Prices: When home prices rise, lenders may increase mortgage rates to protect themselves. If prices fall, lenders might lower rates to make borrowing more attractive.
Economic Health: A strong housing market usually means higher mortgage rates because people are more confident buying. If the economy weakens, rates tend to drop to help stimulate home sales.
Investor Interest: Mortgage rates can also be impacted by how much investors want to buy mortgage-backed securities. High investor demand usually lowers mortgage rates, while lower demand can push them higher.
What is the housing market like right now? The U.S. housing market is cooling down. Rising mortgage rates, caused by efforts to control inflation, have made it more expensive to buy homes. Fewer people are buying because of high borrowing costs.
Although home sales have slowed, house prices aren’t dropping much because there aren’t enough homes for sale in many areas. Overall, the market is adjusting to higher rates, making it a tough time for buyers and sellers.
To Buy or Not to Buy—Mortgage Minds’ Experts Can Help You Decide
Predicting 2025 mortgage interest rates involves navigating a mix of economic signals and trends. While some experts foresee a drop, others caution that market conditions could keep rates steady or even increase them.
Staying informed is key whether you’re looking to buy your first home or refinance an existing loan. The Mortgage Minds Group is here to help you understand the market and find the best options for your needs. Reach out to us today for personalized guidance!
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