Mortgage Rate Predictions: Fewer Fed Rate Cuts on the Horizon in 2025

On Wednesday, the Federal Reserve cut interest rates by 0.25% during its final policy meeting of the year. But prospective homebuyers hoping for lower mortgage rates this holiday season are likely to be disappointed. 

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The Fed previously slashed interest rates by 0.5% in September and by 0.25% in November. After both rate cuts, mortgage rates went up, not down. 

That’s because the central bank doesn’t directly set home loan rates. Mortgage rates are volatile and tend to move ahead of the Fed’s policy decisions, as they’re driven by investor expectations and shifts in bond yields. 

In early December, investors started “pricing in” this year’s final 0.25% cut. By the time the Fed announced its decision to lower interest rates on Dec. 18, 30-year fixed mortgage rates had already dropped by roughly 0.2% from their November highs of around 7%. 

“Investors trade more on anticipation than fact,” said Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage. 

Given recent strong economic data and uncertainty over whether President-elect Donald Trump’s tax and tariff proposals will reignite inflation, experts now anticipate a far slower pace of rate cuts in 2025. 

Read more: 2025 Mortgage Predictions: Low Rates Aren’t Likely to Return Under Trump

Will this be the last interest rate cut for a while? 

Though a slower pace of rate cuts in 2025 would keep upward pressure on mortgage rates, that isn’t a certainty. If incoming data shows cooler inflation or a weakening labor market, the Fed will continue easing interest rates, allowing mortgage rates to come down over time. 

The central bank has two main objectives: maintain maximum employment and contain inflation. It relies on inflation and labor data, which acts as a barometer for the health of the economy, when deciding whether to adjust its benchmark short-term interest rate up or down. 

Recent inflation data, which showed prices rising 2.7% annually in November, was not so strong as to discourage the Fed from cutting interest rates this week. But it does raise alarms that progress has stalled, if not halted altogether, on getting inflation down to the Fed’s 2% annual target. 

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“Mortgage rates will take direction from the bond market, which also reacts to inflation and other economic data,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “If the economy continues to remain on solid footing, then it is likely that we will see little downward movement in mortgage rates.” 

Where are mortgage rates headed in 2025?

Although experts optimistically predicted rates would fall close to 6% by the end of 2024, projections have changed significantly. Fannie Mae now expects average 30-year fixed mortgage rates to hold above 6.5% until early 2025. 

“If the Fed does end up only cutting twice next year, it’s possible mortgage rates will stay pretty similar to where they are now,” said Chen Zhao, head of economic research at Redfin. 

But that forecast could shift higher or lower over the coming months, with a new administration, changes in the geopolitical outlook, and a risk of inflation rebounding. Future rate movement depends on an array of factors, including:

Trump’s economic policies: Trump’s proposals for tax cuts and tariffs are a big wild card for mortgage rates. Experts say such moves could stimulate demand, increase deficits and push inflation back up. That could prompt the Fed to delay future rate reductions, which in turn would keep home loan rates high.

10-year Treasury yields: Average 30-year fixed mortgage rates closely track bond yields, specifically 10-year Treasury yields. If inflation and labor data continues to be strong, bond yields and mortgage rates will go up. The opposite will happen if unemployment rises or inflation cools and the Fed continues cutting rates. 

Geopolitical situations: Mortgage rates are also impacted by geopolitical events, including military conflicts and elections. Political instability can lead to economic uncertainty, which can result in more volatility with bond yields and mortgage rates.

Potential curveballs: Bond investors often act in anticipation of what they believe will happen in the economy. For example, if the expectation is for unemployment to increase, bond yields and mortgage rates will fall. But if the outcome doesn’t match market expectations, yields can quickly swing higher or lower.

Other unknowns: Though Trump’s policies have led to expectations of higher inflation, there’s still a lot of uncertainty surrounding the timing and substance of economic changes and the Fed’s cadence of interest rate adjustments over the next year. Campaign promises rarely mirror the policies that end up being implemented, and it’s nearly impossible for investors to predict how big the gap between the two will be. 

Aside from the normal day-to-day volatility, we’re probably looking at mortgage rates above 6% for a while. That may seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn. Since the 1970s, the average rate for a 30-year fixed mortgage has been around 7%. 

Prospective homebuyers who’ve been waiting for mortgage rates to drop for the past few years may need to adjust to the “new normal” in the mortgage market, with rates fluctuating between 5% and 7% over the longer term.

What else is happening in the housing market?

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Today’s unaffordable housing market results from high mortgage rates, a long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation.

🏠 Low housing inventory: A balanced housing market typically has five to six months of supply. Most markets today average around half that amount. Although we saw a surge in new construction in 2022, according to Zillow, we still have a shortage of around 4.5 million homes.

🏠 Elevated mortgage rates: At the start of 2022, mortgage rates were near historic lows of around 3%. As inflation surged and the Fed began hiking interest rates to tame it, mortgage rates roughly doubled within a year. In 2024, mortgage rates are still high, effectively pricing millions of prospective buyers out of the housing market. That’s caused home sales to slow, even during typically busy home-buying months, like the spring and early summer.

🏠 Rate-lock effect: Since the majority of homeowners are locked into mortgage rates below 6%, with some as low as 2% and 3%, they’re reluctant to sell their current homes since it would mean buying a new home with a significantly higher mortgage rate. Until mortgage rates fall below 6%, homeowners have little incentive to list their homes for sale, leaving a dearth of resale inventory.

🏠 High home prices: Although home buying demand has been limited in recent years, home prices remain high because of a lack of inventory. The median US home price was $434,568 in September, up 5.1% on an annual basis, according to Redfin.

🏠 Steep inflation: Inflation increases the cost of basic goods and services, reducing our purchasing power. It also impacts mortgage rates: When inflation is high, lenders typically set interest rates on consumer loans to compensate for the loss of purchasing power and ensure a profit. 

Expert advice for homebuyers

It’s never a good idea to rush into buying a home without knowing what you can afford, so establish a clear homebuying budget. Here’s what experts recommend before purchasing a home: 

💰 Build your credit score. Your credit score is one of the main factors lenders consider when determining whether you qualify for a mortgage and at what interest rate. Working toward a credit score of 740 or higher will help you qualify for a lower rate.

💰 Save for a bigger down payment. A larger down payment will allow you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, making a down payment of at least 20% will also eliminate the need for private mortgage insurance. 

💰 Shop around for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend you get at least two to three loan estimates from different lenders before making a decision. 

💰 Consider the rent vs. buy equation. Choosing to rent or buy a home isn’t just comparing monthly rent to a mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over your housing costs. The best choice depends on your finances, lifestyle and how long you plan to stay in one place. 

💰 Consider mortgage points. One way to get a lower mortgage rate is to buy it down using mortgage points. One mortgage point equals a 0.25% decrease in your mortgage rate. Generally, each point will cost 1% of the total loan amount.

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