When will rates on mortgages drop? A review of 2025 and 2024.
Mortgage rates have increased from late 2022 to 6% to 7%. In the fall of 2023, they almost surpassed 8%, which represents the highest rate for a 30-year mortgage in more than 20 years.
Mortgage payments have skyrocketed due to increasing rates combined with rising home prices. The average monthly mortgage payment for a newly purchased home is currently $2,256, up nearly 7% from a year earlier, according to the Mortgage Bankers Association. Since over 90% of current homeowners have rates under 6% and may not want to give up their lower rate, the surge has turned off many potential buyers and discouraged current homeowners from selling.
It begs the question of how long these higher rates can continue. And when—if at all—can borrowers anticipate a sufficiently low mortgage rate to make their monthly payments somewhat more doable? We know the following.
When will rates on mortgages drop?
It’s critical to comprehend the reasons behind the initial rate hike in order to predict when mortgage rates will decline.
Most of the time, inflation is the cause. The Federal Reserve raised interest rates in an effort to curb spending as inflation increased. The benchmark federal funds rate, or the rate at which banks lend money to one another, was raised by the central bank eleven times between 2022 and 2023, moving it up from almost 0% to the current range of 5.25% to 5.50%. Although they are not directly correlated, mortgage rates typically climb in response to increases in the Fed rate.
Even though the Fed’s actions have mainly been successful in reducing inflation, they haven’t been sufficient. Inflation in April 2024 exceeded the central bank’s target of 2% by a significant margin, coming in at 3.4% year over year. In an effort to further reduce inflation, the Fed has been maintaining its higher interest rates as a result.
Current mortgage rates are also rising due to those higher rates for longer periods of time. Mortgage interest rates are expected to stay high until the Fed determines that inflation is under control and begins to lower its benchmark rate, according to analysts.
Evan Luchaco, a home loan specialist with Churchill Mortgage in Portland, Oregon, stated via email that “we need to see inflation numbers decreasing, new job creations slowing down, and potentially unemployment filings increasing in order to see rates improve.” “The Fed will act to lower the Fed funds rate, which will have a trickle-down effect to lower mortgage rates, as these are all signs of an economic slowdown.”
While not definite, Luchaco anticipated that this would begin to occur before the end of the year. The CME FedWatch Tool now indicates that a minor rate decrease is expected during the bank’s September meeting, with further possible rate cuts to follow. The tool monitors investing activity to predict future Fed decisions.
“We need to see inflation ease in order for rates to come down,” sent an email from Jennifer Beeston, senior vice president of mortgage financing at Guaranteed Rate. “That appears to potentially fall based on current economic predictors; however, all of the projections have been incorrect for the last two years.”
Forecasts for mortgage rates
When rates will decline is impossible to foretell with a crystal ball, and opinions vary widely on rate projections.
Here’s where two significant companies in the market anticipate that mortgage rates will be in the coming years:
As you can see, both forecasts indicate a very gradual decline in rates over the next year or two. Additionally, experts do not anticipate any sharp declines in rates, such as those that occurred at the height of the COVID-19 pandemic, of 3% or 4%.
“A substantial decrease in interest rates would only occur in the event of a severe recession in the United States,” said Neil Christiansen, a Denver-based home loan specialist with Churchill Mortgage. “I don’t see a significant rate cut anytime soon, but the way things are going, the Fed could cut rates drastically to jump-start the economy if they see it slowing and stalling.”
When is the best time to buy a home—when the mortgage rate drops?
Over the coming years, rates should decrease, but not much. So, is waiting for a better deal worthwhile? Each person will have a different response, so start by running the numbers.
“I often show the payment now versus a percent lower for people waiting for rates to come down,” Beeston added. “They are frequently astounded by how little has changed. A $1 million purchase has a significantly more dramatic effect on your payment than a $100,000 one does.
An illustration of how a rate reduction would affect your principal and interest payment on a $250,000, $500,000, or $1 million mortgage is provided below.
In addition, you ought to consider the state of the home market. Even while your monthly payment might go down slightly due to reduced mortgage rates, there might be greater competition for houses when rates drop. This might lead to bidding wars, which raise prices further, and an increase in property prices.
Home prices aren’t going to drop significantly, and even if interest rates do, Luchaco noted that this would probably just encourage more individuals to enter the market, which would raise demand for property and drive up prices even further.
For this reason, the majority of experts advise waiting to purchase a property until the time and finances are right. Experts advise taking action if you need to escape the rent race and are eligible for a rate and payment you can afford. If rates go down in the future, you can prepare to refinance.
Christiansen stated, “From my vantage point, even in the current rate environment, the cost of waiting will continue to hurt the buyer.” “Home prices are rising at a rate of five to six percent annually, and the buyer loses more opportunity to increase their net worth the longer they wait due to the loss of appreciation and loan pay-down.”
Purchasing early on gives you the opportunity to begin accumulating home equity.
How to cut your mortgage interest rate
The actual rate you will receive on a mortgage varies on a number of factors, including your loan size, credit score, mortgage provider, and more. Currently, 30-year fixed mortgage rates average around 7%.
Compare mortgage lenders to make sure you’re receiving the best rate available. Obtain a loan quote from each, then compare the costs and interest rates. Freddie Mac estimates that you might save anywhere from $600 to $1,200 year by doing your research.
Since borrowers with better credit scores typically receive cheaper loan rates, you should also focus on raising your credit score.
Lastly, think about a buydown of interest rates. When you buy down your rate, you pay an upfront fee on closing day in exchange for a temporary or permanent reduction in your interest rate. If you’re interested in this tactic, speak with your mortgage loan officer.
FAQs on predicting mortgage rates
In 2024, will mortgage rates decrease?
In 2024, mortgage rates may decrease, but it’s not a given. By year’s end, the Mortgage Bankers Association forecasts a 6.5% rate, while Fannie Mae estimates a 7% rate by 2024.
Will 3% mortgage rates ever again be reached?
Only in the most dire circumstances—namely, at the height of the COVID-19 pandemic—have mortgage rates ever been at 3% or less. For rates to drop to that level once more, the economy would need to drastically worsen.
In five years, how will mortgage rates be structured?
Although there are no official sources for five-year interest rate projections, the Mortgage Bankers Association projects that 30-year mortgage rates will fall to 5.9% by the end of 2025. A 6.6% rate is projected by Fannie Mae.
Are interest rates on mortgages declining?
At least not very much, mortgage rates are not falling right now. For the most of the previous two years, the average rate for 30-year loans has been consistent, ranging from 6% to 7%.