Image by Getty Images. Illustration: Hunter Newton/Bankrate
The average 30-year fixed mortgage rate spends most of the year at 6 percent, with occasional spikes above 7 percent, but never below 6 percent.
— Greg McBride, Bankrate Chief Financial Analyst
Everyone expected mortgage rates to drop in 2024, but mortgage rates remained stubbornly elevated despite the Federal Reserve cutting rates three times.
Greg McBride, CFA, chief financial analyst at Bankrate, expects more of the same in 2025, with interest rates recovering before settling at 6.5% by the end of the year.
“The average 30-year fixed mortgage rate spends most of the year in the 6% range, with occasional increases above 7%, but never below 6%,” McBride says. “Mortgage rates will remain elevated due to continued economic growth and concerns about inflation and government debt.”
Going into 2024, the average interest rate on a 30-year fixed mortgage was 6.9%, according to Bankrate’s national statistics. Lender research. By the end of the year, the rate was 7.04%.
There was a lot of excitement in between. Mortgage rates rose above 7% in the spring, but fell to 6.2% in September, just before the Federal Reserve announced the first of three rate cuts in 2024.
But fixed mortgage rates have only gone up since the Fed started cutting rates, which is a strong reminder that: Mortgage prices are not determined by the Fed.but it depends on the investor’s appetite and the private lender.
In particular, 30-year mortgage rates are often tied to 10-year Treasury yields. as inflation Investors are bidding on these 10-year rates because they are still above the central bank’s 2% target.
“In an environment where inflation is stubborn and economic growth is strong, there aren’t many factors that could significantly lower long-term interest rates,” McBride said.
How do mortgage rates affect the housing market?
Until 2022, the conventional wisdom was that lower mortgage rates would push up housing prices, but higher mortgage rates would cause housing prices to fall. This theory was tested in 2022 and 2023, when mortgage rates jumped from 3% to 8%. Despite the significant increase, housing prices continued to rise.
What about the lesson? Home prices are determined by complex supply and demand factors, and mortgage rates are only one part of the equation. On the other hand, home prices may be reaching their logical limit given the affordability challenges faced by first-time buyers.
“There is more supply on the market and homes are taking longer to sell,” McBride says. “Going forward, house price increases will be much slower. House prices will only sell for what people can afford.”
- Build your credibility. Although it is possible to get a mortgage with a credit score below 620, the most favorable mortgage terms are given to borrowers with a score of 780 or higher. Here are some strategies to improve your credit before applying for a mortgage.
- Don’t get too obsessed with timing mortgage rates. Mortgage rates are notoriously difficult to predict, so if you’re ready to buy a home, it’s better to lock in your rate. Loan officers and real estate agents are starting to use the phrase, “You marry the house to determine the interest rate.” This means that even if mortgage rates drop in the future, you can always refinance to a lower rate.
- Be careful with ARM. While the introductory rates for adjustable-rate mortgages (ARMs) may seem attractive, “don’t fall into the trap of using an ARM as a means to affordability,” McBride says. “Although there is little initial savings, averaging just 0.5 percentage points over the first five years, the risk of future interest rate increases is greater. New adjustable mortgage products are now the norm compared to 12 It is configured to change every six months instead of every month.”
- Comparison Shop Lenders. “By doing an online search, you can find lenders that offer lower interest rates and more competitive fees, saving you thousands of dollars,” says McBride. Compare offers from at least three, preferably five, financial institutions.
