Forecast: Mortgage rates to settle in 2025

Everyone expected mortgage rates to fall in 2024. Instead, they remained stubbornly elevated — even as the Federal Reserve cut rates three times.

Greg McBride, CFA, chief financial analyst for Bankrate, expects more of the same in 2025, forecasting rates to bounce around before landing at 6.5 percent by the end of the year.

“The average 30-year fixed mortgage rate will spend most of the year in the 6s, with a short-lived spike above 7 percent, but never getting below 6 percent,” McBride says. “Continued economic growth and worries about inflation and government debt will keep mortgage rates elevated.”

What happened to mortgage rates in 2024

Heading into 2024, the average rate on a 30-year fixed mortgage was 6.9 percent, according to Bankrate’s national survey of lenders. By the close of the year, that rate was 7.04 percent.

There was plenty of excitement in between. Mortgage rates surged above 7 percent in the spring, then fell all the way to 6.2 percent in September, just before the Federal Reserve announced the first of what would be three rate cuts in 2024.

However, fixed mortgage rates have only gone up since the Fed started cutting — a powerful reminder that mortgages aren’t priced by the Fed, but by investor appetite and individual lenders.

Thirty-year mortgage rates, specifically, often move with the 10-year Treasury yield. As inflation remains above the central bank’s 2 percent target, investors have been bidding up those 10-year rates.

“In an environment where inflation is stubborn and economic growth is strong, there’s just not much to push long-term interest rates materially lower,” McBride says.

How will mortgage rates affect the housing market?

Up until 2022, conventional wisdom said that falling mortgage rates boosted home prices, while rising mortgage rates would cause home prices to fall. That theory was tested in 2022 and 2023, when mortgage rates shot from 3 percent to 8 percent. Despite the big jump, home prices kept climbing.

The lesson? Home prices are set by complicated supply-and-demand factors, and mortgage rates are just one part of that equation. Meanwhile, it’s possible that home prices have hit their logical limits, given the affordability challenges facing first-time buyers.

“You are seeing more supply coming on market, and houses taking longer to sell,” says McBride. “We’re going to see pretty tepid home price appreciation going forward. Home prices can only sell for what people can afford to pay.”

Next steps for borrowers

• Get your credit in shape. Though it’s possible to get a mortgage with a credit score of 620 or even lower, the best deals on mortgages go to borrowers with a 780 score or higher. Here are our strategies to improve credit before applying for a mortgage.
• Don’t get too caught up trying to time mortgage rates. Mortgage rates are notoriously difficult to predict, so if you’re ready to buy a home, it’s likely better to go ahead and lock your rate. Loan officers and real estate agents have begun deploying the phrase “marry the house, date the rate” — meaning, if mortgage rates fall in the future, you can always refinance to a lower rate.
• Be cautious about ARMs. The introductory rate on an adjustable-rate mortgage (ARM) might look tempting, but “don’t fall into the trap of using an ARM as a crutch of affordability,” McBride says. “There is little in the way of upfront savings, an average of just one-half percentage point for the first five years — but the risk of higher rates in future years looms large. New adjustable mortgage products are structured to change every six months rather than every 12 months, which had previously been the norm.”
• Comparison-shop lenders. “Conducting an online search can save thousands of dollars by finding lenders offering a lower rate and more competitive fees,” McBride says. Compare offers from at least three — and preferably five — lenders.