Why mortgage rates are still high despite the Fed rate cuts

The calendar has turned to a new year, bringing with it a tricky environment for mortgage borrowers to navigate. Closing out the year on a positive note, mortgage rates fell by a full percentage point after the Federal Reserve delivered three consecutive rate cuts. The moves dropped the federal funds rate — the rate banks charge to lend each other money — from a range of 5.25% to 5.50% in September to 4.25% to 4.50% in December.

Inflation also trended downward in 2024, though the decline wasn’t significant.  A year ago, the annual inflation rate stood at 3.1%, which dipped over the summer and ticked back up in November to settle at 2.7%, according to the latest Consumer Price Index. Mix in a stronger-than-expected jobs report in December, and you can understand the Fed’s decision to cut rates and the potential for lower mortgage rates.

When the Fed cuts rates, it often leads to lower mortgage rates because borrowing costs drop overall. Unfortunately, though, mortgage rates have instead climbed higher since the Fed rate cuts. Here’s why that’s happened.

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Why mortgage rates are still high despite the Fed rate cuts

According to Freddie Mac data, the average rate on a 30-year, fixed-rate mortgage is 7.01% as of January 14, 2025. That’s nearly 1% higher than the 6.09% average rate from September 19, 2024, which was the rate immediately available after the Fed’s first rate cut in over four years. But as experts point out, the Fed’s decisions aren’t the only indicator of where mortgage rates are headed.

“If only it were that simple,” says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage. “The best benchmark for mortgage rates is the ten-year treasury. Yields, unfortunately, are the highest they have been in over a year, and that typically means we will see rates continue to tick up until this settles down.”

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DeFlorio also cites inflation concerns from tariffs, global unrest and data showing inflation isn’t yet under control as factors driving market nervousness. 

“Hopefully, as we move through this year, things will settle down, and we will see a meaningful and lasting dip in rates,” DeFlorio says.

Robert Johnson, CEO of Economic Index Associates and professor at Creighton University’s Heider College of Business, also agrees other factors are at play. 

“While Federal Reserve monetary policy is a factor influencing interest rates, it is certainly not the only factor. Fiscal policy, expected trade policy and the strength of the U.S. economy are also factors that influence interest rates. It appears that in the current environment, these other factors are counteracting dovish monetary policy,” Johnson says.

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How the bond market impacts mortgage rates

As mentioned, mortgage rates haven’t fallen in line with the Fed’s rate cuts because they depend on factors beyond the agency’s benchmark rate, such as the economy and 10-year Treasury bond yields. For example, when the 10-year treasury rate goes up, mortgage rates tend to follow, and vice-versa. 

Although treasury bonds and mortgage rates tend to move in similar patterns, they’re not the same. Mortgages come with higher risk, which is why their interest rates have historically been 1.7% to 2.25% higher. On January 9, for example, the average mortgage rate of 6.93% was 2.25% higher than the 10-year Treasury rate of 4.68%. 

These above-average bond rates are one reason mortgage rates remain high. They raise borrowing costs for lenders by increasing the returns investors are looking for on mortgage-backed securities, which lenders then pass on to borrowers.

“Higher yields mean higher rates. Banks are always quick to raise rates when we see these jumps in the market and, of course, much slower to bring them down,” DeFlorio says. 

How soon might mortgage rates start to decline?

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It could be a while before mortgage rates drop significantly, at least until the Fed signals they believe inflation is well under control. To better grasp which way rates may be heading, pay attention to inflation, jobs and consumer confidence reports, to gauge economic trends. For now, patience may be necessary.

“I have been saying for a while that it would be late 2025 before we see any noticeably lower rates, and even that may be too early,” says Mason Whitehead, branch manager at Churchill Mortgage. 

Whitehead also notes that mortgage rates in the 6% and 7% range could persist for some time, making it unlikely that waiting will result in significantly lower rates in the near future. 

Still, rates are on par with historical norms, notes Whitehead. 

“The issue is that so many consumers now think that the rates we had in 2020 and 2021 are ‘normal’ and want to ‘wait for rates to drop.’ Historically, a rate in the 6’s is actually very good,” Whitehead says.

The bottom line

Even if mortgage rates aren’t falling as quickly as you may hope, you might reap benefits by buying a home now rather than waiting for rates to fall. If your finances are solid and you can comfortably afford the mortgage and other homeownership costs, buying now could help you lock in your housing costs as rents continue to rise. You might also face less buyer competition — and a lower likelihood of a bidding war — by purchasing now before the housing market heats up.

As the saying goes, “date the rate, marry the house.” If rates fall in the future, you can refinance to take advantage of the lower rate. If you do decide to buy now, compare quotes from several lenders to get the most competitive rate.