Will Mortgage Rates Drop in 2025? Insights You Can’t Afford to Miss!

Since late 2022, mortgage rates have soared to a range of 6% to 7%. However, as we approach summer 2024, there’s a glimmer of hope on the horizon, with rates beginning to ease in anticipation of the Federal Reserve’s decision to cut the federal funds rate by 25 basis points in its upcoming September 18 meeting.

Indeed, the Fed announced a favorable rate reduction during its September meeting, followed by another cut in November. With expectations for yet another reduction on December 18, mortgage rates have been gradually declining as buyers await this crucial development. Plus, the decline in interest rates aligns with a falling 10-year Treasury yield. But the burning question remains: when can we expect mortgage rates to drop significantly enough to make monthly payments more manageable?

Dig deeper: When will the housing market crash again?

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Good news first!

Mortgage rates have indeed dropped significantly since autumn 2023. As of mid-December 2023, the 30-year fixed mortgage rate has settled at 6.95%, while the 15-year fixed rate stands at 6.38%. Both rates have seen a reduction of over 30 basis points since earlier this year.

But here’s the flip side: since September, the decline in mortgage rates hasn’t exactly been meteoric. Following the Federal Reserve’s rate cuts in September and November, rates remained relatively flat or even ticked upwards. Yet, hope flickers as mortgage rates have begun to inch down recently, fueled by anticipation of another Fed cut in December.

In essence, while mortgage rates are trending down, the speed of that decline is less brisk than many had hoped.

To truly understand when we can expect more dramatic decreases in mortgage rates, it’s crucial for potential homebuyers to comprehend why these rates surged in the first place.

Primarily, rising mortgage rates have been linked to inflation. As inflation escalated, the Federal Reserve responded by hiking interest rates to curb spending. Over 2022 and 2023, the central bank raised its benchmark federal funds rate a staggering 11 times, bumping it up from nearly 0% to a range of 5.25% to 5.50%.

Fast forward to September 18, 2024, when the Fed announced another rate cut, bringing it down to the 4.75% to 5.00% range. This was followed by a further reduction to 4.50% to 4.75% in November. Although mortgage rates aren’t directly tied to the Fed’s actions, a correlation exists—typically, mortgage rates rise with Fed rate hikes and fall when the Fed cuts rates.

With the federal funds rate on the decline, many buyers are optimistic that mortgage rates will follow suit. However, the anticipation of the September cut had already nudged rates down in advance, and expectations for the smaller November cut tempered further declines.

While mortgage rates have been trending downward in recent weeks, a significant drop before the end of 2024 seems unlikely unless the Fed surprises us with an unexpected rate cut at its December meeting.

In September, the Fed hinted at multiple rate cuts throughout 2025, sparking hopes for lower mortgage rates next year. However, with the recent presidential election results bringing unforeseen changes, some economists are now predicting an uptick in inflation and a sustained high 10-year Treasury yield. This suggests that substantial drops in mortgage rates may take longer than anticipated.

So, how long will it be? It’s hard to say precisely—but experts have their opinions.

According to Fannie Mae’s latest forecasts, 30-year mortgage rates are expected to hover around 6.60% by the close of 2024 and drop to 6.30% by Q4 2025. This is a shift from their earlier, more optimistic predictions of 6% in Q4 2024 and 5.60% by the end of 2025.

The Mortgage Bankers Association (MBA) echoes a similar sentiment, forecasting a 30-year rate of 6.60% by the end of 2024 and 6.40% by Q4 2025. Just last month, the MBA’s prediction had rates ending 2023 at 6.30% and 2025 at 5.90%.

In short, economic expectations have grown less optimistic over the past month. While rates may dip in 2025, the magnitude of that decline is unlikely to meet prior expectations.

Additionally, both Fannie Mae and the MBA have provided projections for 2026, forecasting rates at around 6.10% and 6.30%, respectively.

Dig deeper: What determines mortgage rates? It depends.

While current rates are lower than last year, the potential for rates to fall below 6% in the immediate future seems slim. So, is it wise to wait for lower rates? The answer varies for each individual, but running the numbers is a good start.

“For those holding out for lower rates, I often compare their current payment to what it would be with a lower rate,” says Jennifer Beeston, a senior mortgage lending VP. “Many are surprised by how little the difference is. The impact of a rate drop is significantly more pronounced on larger purchases, like a $1 million home, compared to a $100,000 one.”

Here’s an example of what a rate drop could mean for your mortgage payment on homes priced at $250,000, $500,000, or $1 million.

Read more: How much is a mortgage on a $500,000 house?

That said, the average American might not see rates dip below 6% in the next year or two.

Beyond the rates themselves, consider the housing market dynamics. While lower mortgage rates could offer some relief on your monthly payment, they may also intensify competition for homes, potentially driving up prices and sparking bidding wars.

“Home prices are unlikely to decrease significantly. Although rates might decline, this could merely lead to more buyers entering the market, increasing demand, and subsequently pushing home prices higher,” warns Evan Luchaco, a home loan expert.

That’s why many experts advise purchasing a home when the timing and financials align for you. If you’re ready to escape the rental cycle and can secure a rate and payment that fits your budget, don’t hesitate—jump in! You can always refinance later if rates drop further.

“From my perspective, the cost of waiting continues to negatively impact buyers, even in the current rate climate,” says Neil Christiansen, another home loan specialist. “The longer you wait, the more you miss out on building wealth.”

By making a move sooner rather than later, you can start building equity in your home.

Dig deeper: Which is more important, your interest rate or house price?

While average 30-year fixed mortgage rates currently hover around 6.60%, the specific rate you receive will depend on various factors such as your loan amount, credit score, and lender.

To secure the best mortgage rate possible, don’t forget to shop around. Obtain Loan Estimates from different lenders to compare rates and fees. According to experts, doing your homework can save you between $600 and $1,200 annually.

It’s also beneficial to improve your credit score, as higher scores often lead to lower interest rates.

Lastly, consider an interest rate buydown option. This allows you to lower your rate temporarily or permanently in exchange for an upfront fee at closing. If this piques your interest, reach out to your mortgage loan officer to explore this strategy.

Learn more: 5 strategies to get the lowest mortgage rates

Indeed, experts like Fannie Mae and the Mortgage Bankers Association predict a slight decline in mortgage rates through 2025 and 2026—but projections currently suggest rates won’t drop below 6% in the foreseeable future.

Mortgage rates are likely to trend downward in 2025, though the decline may be gradual.

Historically, mortgage rates have only dipped to 3% or lower under exceptional circumstances, like during the peak of the COVID-19 pandemic. For rates to fall that low again, we would need a significant deterioration in economic conditions.

While there are no official long-term projections for interest rates beyond five years, the Mortgage Bankers Association anticipates 30-year fixed rates to settle at around 6.30% by 2027.

Mortgage rates have seen fluctuations, rising from mid-September to late November, yet they have recently begun to decline.