By When Will Mortgage Rates Go Down?
Mortgage rates are expected to fall below 6% in 2025, but the forecast is far from guaranteed. In January 2023, some analysts thought that rates would be around 4.5% by the end of 2024, which obviously didn’t come to pass.
Fed Chair Jerome Powell says it best: “Forecasting are highly uncertain. Forecasting is very difficult. Forecasters are a humble lot with much to be humble about.”
Rates will likely continue moderating in 2025 and 2026, especially if economic conditions continue to soften. However, rates will stay relatively high as long as the economy keeps outpacing expectations – and either way, economists don’t anticipate a dip into the 3% or 4% range in the foreseeable future.
Here are the mortgage rate predictions over the next two years:
• Fannie Mae: Rates Will Average 5.7% in 2025
The October Housing Forecast from Fannie Mae puts the average 30-year fixed rate at 6% by year-end, a decline from 6.5% in the third quarter. All told, the mortgage giant predicts mortgage rates will average 6.6% in 2024 and 5.7% in 2025.
• MBA: Rates Will Fall to 5.9% in 2025
The Mortgage Bankers Association predicts in its October Mortgage Finance Forecast that mortgage rates will fall from 6.5% in the third quarter of 2024 to 6.3% by the fourth quarter. The industry group expects rates will fall to 5.9% in the third quarter of 2025 and will continue declining to 5.9% in late 2025 and early 2026.
• NAHB: Rates Will Average 5.94% in 2025
The National Association of Home Builders expects the 30-year mortgage rate to average 5.94% in 2025, falling to 5.69% in 2026, according to its October Housing and Interest Rate Forecast. The trade group is forecasting that “sustained, sub-6% mortgage interest rates” will begin in the second quarter of 2025, something it previously forecasted to happen in the fourth quarter.
• Wells Fargo: Rates Will Average 5.86% in 2025
In its latest U.S. Economic Outlook, the Economics Group of Wells Fargo Bank puts the 30-year conventional mortgage rate at 6.3% in the fourth quarter of 2024 – a slight increase from when rates dipped in the third quarter. Wells Fargo economists predict that the average rate will dip below 6% in the second quarter of 2025, which is pushed further out from their previous forecast that expected sub-6% rates in the first quarter.
How Fed Rate Cuts Impact Mortgages
While it might seem counterintuitive, mortgage rates have actually risen since the Federal Open Market Committee began cutting the federal funds rate.
Mortgage rates fluctuate for a number of reasons: economic conditions, investor demand and Federal Reserve policy, to name a few. It’s not a one-to-one relationship between the federal funds rate and mortgage rates. The 30-year fixed rate more closely tracks the yield on 10-year Treasury bonds.
Mortgage interest rates (and Treasury yields) have bounced up and down over the past several months, with the 30-year fixed rate on a home loan going from 7% in May to the low 6% range by September – before reversing course to nearly 7% again in October.
The FOMC and mortgage lenders often react similarly to economic factors like inflation and employment, and lenders tend to “price in” anticipated rate cuts. Interest rates on mortgages and other borrowing products tend to be high when the economy is strong, and vice versa.
“The discourse around the timing and pace of potential future rate cuts will likely drive the near-term path of interest rates rather than the actual policy decision itself,” Freddie Mac researchers say in a September economic outlook.
Over the past few years, analysts had been predicting lower mortgage rates because the U.S. economy was expected to fall into a recession. But the fundamentals of our economy – like employment and GDP growth – are outpacing expectations, resulting in higher long-term interest rates.
Still, the Fed has made progress toward its dual mandate of stable prices and maximum employment, giving officials the confidence to cut rates. The FOMC voted to cut the benchmark by 50 basis points, or a half percentage point, in its September meeting, followed by a quarter-point cut in November.
The Fed rate cuts themselves shouldn’t have an outsized impact on long-term fixed mortgage rates, but they will affect borrowers who have an adjustable-rate mortgage or variable-rate home equity line of credit.
Advice for Buying or Selling a Home in 2024
Mortgage rates are expected to decline later this year and next, which has implications for prospective homebuyers and sellers. But regardless of current mortgage rate trends, Americans will still have reasons to move, whether they want to downsize in retirement or need to relocate for a better job.
Here’s what you should consider if you’re planning on buying or selling a home in 2024.
What Buyers Should Know: Home Prices Won’t Come Crashing Down
Good things may come to those who wait, but patience doesn’t always pay off in the housing market. Two-thirds of homebuyers are waiting for mortgage rates to fall this year before buying a home, according to a March U.S. News survey. The vast majority of them (85%) wanted to see rates below 6% before entering the market, which hasn’t happened – and it isn’t expected to happen until 2025.
In the time that homebuyers have been holding out for lower rates, home prices have continued to rise. Since the beginning of 2024 alone, home prices have appreciated by 4.5%, according to the S&P CoreLogic Case-Shiller Home Price Index.
Real estate markets are expected to stabilize this year – but buyers shouldn’t expect housing prices to come crashing down, at least not on a national level.
“While potential homebuyers have noticed the decline in mortgage rates over the last few months, they are equally aware that there has been little relief on the home price side, the other primary driver of unaffordability, particularly for first-time buyers,” says Mark Palim, Fannie Mae’s vice president and deputy chief economist, in an Oct. 17 statement.
Here are a few home price forecasts from top U.S. housing groups:
- Fannie Mae: Home prices will rise 5.8% in 2024 and 3.6% in 2025.
- Freddie Mac: Home prices will rise 2.1% in 2024 and 0.6% in 2025.
- MBA: Home prices will rise 3.8% in 2024, 1.6% in 2025 and 1.7% in 2026.
- NAR: Existing home prices will increase from $403,400 in 2024 to $410,700 in 2025 and $420,000 in 2026.
- Realtor.com: Existing home sales prices will increase 4.6% in 2024.
Although real estate values aren’t likely to drop significantly, it’s still positive that they probably won’t keep rising at the double-digit pace seen in 2021 and 2022. Without over-the-top bidding wars to drive home prices through the roof, buyers can expect more properties to choose from.
That’s not to say it will be a buyer’s market, but there should at least be more balance between buyers and sellers. Buyers may be able to close the deal without waiving important protections like home inspections and appraisal contingencies. What’s more, existing home inventory is forecast to improve (at least marginally) as rates drift lower and some previously rate-locked homeowners decide to sell.
Finally, buyers may find less competition in the new home construction market. Homeowners may be reluctant to sell and sacrifice their low mortgage rates, but homebuilders remain eager to close the deal, especially as new home inventory rises. Although new-construction homes are typically more expensive than resale homes, builders may be willing to offer other concessions like price reductions or temporary interest-rate buydowns.
What Sellers Should Know: Remember That You’re a Buyer, Too
Perhaps the biggest hurdle facing sellers is that they still need a place to live once they’ve sold their current home. For many, that means overcoming the lock-in gap to buy a new home at today’s rates and home prices.
According to Federal Housing Finance Agency data, the average interest rate on existing mortgages is 4.1% – far lower than the current prevailing rate available to new homebuyers. In fact, 86% of homeowners have a rate below 6%, and rates aren’t expected to dip below that threshold this year.
Although many prospective sellers would be hard-pressed to give up their sub-3% mortgage rate, Zillow predicts that the rate lock-in effect will wear off somewhat this year as some homeowners grow tired of waiting to move.
Plus, a 2023 Fannie Mae survey suggests that low rates aren’t the only factor keeping people from selling. While a fifth of mortgage borrowers (21%) say that their low mortgage rate is causing them to stay in their home longer, nearly as many said they simply like their current home (19%). Perhaps unsurprisingly, 13% say they’re staying put because current home prices are too high.
However, there is a silver lining for sellers who are also buyers: Many homeowners are sitting on a mountain of equity thanks to double-digit home price appreciation since 2020. Successful sellers can tap into that equity to put toward their next home purchase.
What This Means for Mortgage Refinancing Rates
The forecast for mortgage refinance rates is pretty much the same as the forecast for mortgage purchase rates: They’re likely to decline somewhat this year, but they won’t return to pandemic-era lows anytime soon. Since most homeowners have a lower rate than what’s currently available, it doesn’t really make sense to try to refinance to a lower rate right now.
The exception would be recent homebuyers who borrowed when mortgage rates were high in 2022 and 2023. The vast majority (84%) of Americans who bought a home in the past year plan on refinancing to a lower rate in the future, according to a September 2024 U.S. News survey. Most of them (53%) plan on waiting until rates drop below 5%, and that might not happen within the next three years.
With rates dropping into the mid-5% range, however, many recent buyers will be able to take the opportunity to refinance. The MBA expects that mortgage refinance applications will increase by 37% in 2025, which signals increased refinancing demand among mortgage holders.
Still, it’s possible to refinance if your goal isn’t just to get a lower rate. With rate-and-term refinancing, you can switch to a shorter repayment period, like a 15-year mortgage. Doing so can help you pay off your mortgage faster and save money in the long run, since you’ll be making fewer interest payments to the lender. Because 15-year rates run lower than 30-year mortgage rates, you may be able to improve on your current loan. However, your monthly payments may be significantly higher.
Others may want to refinance as a way to switch from an adjustable-rate mortgage, or ARM, to a fixed-rate mortgage. Refinancing to a fixed rate can help shield you from higher monthly payments when the rate adjusts, which can make it easier to budget for your housing costs. However, fixed rates are generally higher than adjustable rates, so it may be difficult to justify a refinance unless your ARM rate is slated to increase meaningfully. If you expect interest rates to decline in the future, you may want to hang on to your ARM today.
Additionally, some homeowners may want to refinance to access their home’s equity. A cash-out refinance means taking out a larger mortgage than your current loan payoff, allowing you to pocket your home’s equity in cash. This might be possible if your property value has risen dramatically or you’ve paid down your mortgage significantly over the past few years. But keep in mind that you’ll be taking on a larger loan and more debt, paying more interest over time. Plus, you’ll still be stuck with a higher rate. It can be cheaper in the long run to keep your current mortgage and get your cash by taking out a home equity loan or HELOC.
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