Mortgage Rates and the Big Question: Will Interest Rates Go Down in 2025?

In late 2024, the Federal Reserve’s Federal Open Market Committee (FOMC) cut the federal funds rate by 50 points, closing the year with a target range of 4.25% to 4.50%.

This adjustment sparked optimism among real estate investors and potential home buyers. But after the Feds declined to adjust rates last month, people couldn’t help but wonder if the interest rates would go down again.

Below, we’ll discuss the outlook on mortgage rates in 2025 and explore the different factors that could influence their movement in the future. From the Federal Reserve’s decision to market trends, these key factors will determine if the rates will go down or not.

Read on to learn more about this year’s mortgage predictions.

A Quick Overview of Today’s Mortgage Rates

Mortgage rates have dropped since they reached their peak of 8.47% in November 2023. However, the decline has been fluctuating.

While several cuts have been made over the past two years, recent studies show that the 30-year mortgage rate increased from 6% last year to 7%. This rate is significantly higher than the historically low 2-3% in 2020 and 2021.

But how did this happen? While it’s easy to blame the Federal Reserve, its policies and decisions are just one of the many factors driving interest rates.

What Shapes Mortgage Rates? Four Key Factors that Drive Fluctuation

Although federal policies play a significant role in mortgage rate fluctuations, several other elements that influence borrowing costs, such as:

Inflation

Inflation is the rise in the prices of goods and services, which can reduce a currency’s value over time. Once inflation rises, lenders must adjust their interest rates to offset its impact on their profits. Otherwise, the value of their returns will decline.

For example, if the current mortgage interest rate is around 5% and the inflation rate is around 2%, the value of a return will only be at 3%. Essentially, the money lenders receive from mortgage payments will be worth less than what they originally lent out.

Economic Growth

Economic growth is another factor that affects mortgage rates. Key indicators like gross domestic product (GDP) and the employment rate can influence whether this year’s rates decrease.

Positive economic growth can lead to more employment and higher wages, giving people more purchasing power. As a result, demand for mortgages increases alongside interest rates.

Conversely, negative economic growth can lead to more unemployment and lower wages. Interest rates are low during this time because consumers are reluctant to make big purchases or take on loans.

Geopolitical Events

Major events like natural disasters and elections can also affect mortgage rates by creating economic uncertainty.

For instance, policy changes introduced by a newly elected government official can either slow down or stimulate economic growth. Similarly, natural disasters could disrupt supply chains and drive up the prices of goods and services.

Federal Reserve Policies

Federal Reserve policy is the most important factor driving interest rates. The Feds oversee our financial system and keep prices stable but can’t dictate interest rates.

They can only sway it from one direction to another by adjusting the federal fund rates and the money supply. Rates go down when the economy’s money supply increases and vice versa.

These elements are highly volatile, so it’s almost impossible to guarantee an accurate forecast each year. Fortunately, 

Will Mortgage Interest Rates Go Down in 2025?

Market analysts predict mortgage interest rates may decline this year, but the adjustment would not be drastic. According to them, the 30-year mortgage rate will likely stay in the 6% range throughout the year and until 2026.

In addition to this, Federal Reserve Chair Jerome Powell says they’re not in a hurry to adjust their policy stance, especially since inflation is still relatively high and the job market is strong.

He explains that the committee will have to wait until inflation declines or the job market softens before making further cuts.

Economists from various housing groups have also shared different outlooks for this year’s mortgage rates. Fannie Mae’s January Housing Forecast suggests that the average 30-year rate will be 6.7% at the beginning of 2025 and will decline to 6.5% by the first quarter of 2026.

Meanwhile, the Mortgage Bankers Association believes rates will reach 7% at the beginning of 2025 and drop to 6.4% by 2026.  

The National Association of Home Builders predicts that the average rate will decrease to 6.5% by the middle of 2025 and fall below 6% by the end of 2026. In contrast, Wells Fargo expects rates to stay above 6.5% for the next two years, but they believe changes in US trade policy will significantly impact the long-term trajectory of the mortgage market.

What to Expect

The FOMC still has seven meetings left in 2025 to decide whether to adjust the federal funds rate, but their plans remain unclear.

Analysts have mentioned that Powell has not shared any clues about their next moves. However, he has reassured the public that they’re monitoring key economic indicators, particularly inflation and the labor market.

Although inflation is still relatively elevated, the labor market is thriving. Employers are adding more jobs, and unemployment is still low.

When asked about Trump’s plans to enact widespread tariff hikes, Powell said, “The Fed is watching carefully.” He explained that the committee would not respond to the new administration’s policies until it saw how things unfolded.

Conclusion

The mortgage market’s outlook is uncertain right now. While several analysts believe interest rates will gradually decline, external factors like inflation and policy changes will ultimately determine the trajectory of borrowing costs in 2025.

Since the FOMC still has several meetings scheduled throughout the year, it’s crucial for investors and potential homebuyers to stay informed and be prepared for sudden fluctuations.

Monitoring economic trends and staying updated on Federal Reserve decisions will be crucial in navigating the ever-changing mortgage market.

For more tips on property investing, visit NCH’s blog here. 

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.