When it comes to the single biggest purchase of your life, your home, mortgage rates matter. Like, a lot. Even small moves in rates can mean tens of thousands of dollars over the lifetime of your loan.
So if you're looking to buy or refinance in the next few years, you're probably wondering: where are mortgage rates heading in 2025?
Unfortunately, there's no magic 8-ball to predict rates with certainty. But based on key economic factors and expert forecasts, we can make some educated guesses about the mortgage rate environment in 2025.
In this comprehensive guide, we’ll explore everything you need to know, including:
- What drives mortgage rate changes and volatility
- Forecasts for 2025 mortgage rates from major industry players
- How higher rates could impact homebuyers and the housing market
- Strategies buyers and sellers should consider in a rising rate environment
Let’s dive in!
The Economic Drivers That Influence Mortgage Rates
Mortgage interest rates aren't set randomly - they follow the economy. When certain economic conditions exist, rates tend to rise. When conditions change, rates can fall.
These are three of the most important economic drivers to watch that impact mortgage rates.
Inflation Trends Over Time
Inflation - the rate at which prices increase - is enemy number one for low mortgage rates.
When inflation is high, mortgage rates tend to rise along with it. This is because lenders need to increase rates to break even on money that is worth less due to inflation.
Looking back over the past four decades, the correlation is clear. Periods of high inflation in the late 1970s and early 80s also saw double-digit mortgage rates.
Most experts believe inflation will remain elevated through 2025. This ongoing inflationary pressure suggests upward pressure on rates will continue.
Actions from the Federal Reserve
The Fed doesn't directly set mortgage rates. But its policies impact key benchmarks like the Federal Funds Rate that influence mortgage rates.
When the Fed raises this rate, borrowing costs increase across the board. Lenders pass on these increased costs to consumers through higher mortgage rates.
In 2022 alone, the Fed raised rates seven times to get inflation under control. This tightening cycle has already pushed mortgage rates to their highest level since 2002. Further Fed rate hikes are expected in 2023 and 2024, keeping upward pressure on rates.
The Overall Health of the Job Market
The stronger the job market, the more buyers there are able to purchase homes. Higher demand equals higher prices and higher mortgage rates.
Unemployment is expected to remain low through 2025. Combine this with ongoing labor shortages in many fields, and the job market strength will support keeping rates elevated.
Mortgage Rate Forecasts for 2025 from the Experts
Given forecasts for sustained inflation, a hawkish Fed, and a strong job market, what are the experts predicting for mortgage rates in 2025?
Here are the key takeaways from forecasts by Fannie Mae, Freddie Mac, and the Mortgage Bankers Association.
Fannie Mae Predicts Rates Will Remain Above 6%
In their Q4 2022 economic forecast, Fannie Mae predicted:
- Average 30-year fixed mortgage rates will rise to 6.2% in 2023.
- Rates will climb to 6.4% in 2024.
- In 2025, they expect rates to dip slightly to 6.1%.
Fannie Mae sees inflation remaining well above the Fed’s 2% target through 2025. Combined with further Fed rate hikes, this underpins their view that rates will stay elevated above 6% over the next three years.
Freddie Mac Expects Rates Near 6.5% through 2025
In their 2023 mortgage rate analysis, Freddie Mac forecasts 30-year fixed mortgage rates will:
- Surge to 6.8% in Q1 2023.
- Gradually decline to 6.1% in Q4 2023.
- Hold steady around 6.5% throughout 2024 and 2025.
Like Fannie Mae, Freddie Mac believes persistent inflation in the 6-7% range and more Fed rate hikes will prevent a significant drop in mortgage rates over the next three years.
Mortgage Bankers See Rates Above 6% into 2025
The Mortgage Bankers Association (MBA), the mortgage industry’s top trade group, also expects rates will remain elevated above 6% into 2025.
Their forecast sees 30-year rates:
- Increasing to 6.7% in 2023.
- Dropping slightly to 6.3% in 2024.
- Remaining around 6.3% in 2025.
The MBA predicts the Fed will continue rate hikes into 2024 to keep inflation contained. This ongoing tightening will keep upward pressure on rates.
The bottom line: The consensus view is that mortgage rates are likely to stay above 6% on average through 2025 due to persistent inflation and continued Fed rate hikes.
Of course, rates can always vary month-to-month and even week-to-week based on economic data. But overall, expect the rising rate environment to continue over the next three years.
How Do Higher Mortgage Rates Impact Homebuyers?
Now that we know what to expect for mortgage rates in 2025, how will these higher rates impact homebuyers?
For prospective buyers, higher rates present two key challenges:
- Reduced Affordability
Higher mortgage rates mean higher monthly payments. According to Freddie Mac, the median homebuyer has seen their payment jump by around $800 per month over the past two years due to rate increases.
This represents a major affordability hurdle, especially for first-time buyers. It may force some buyers to opt for lower priced homes or explore adjustable rate mortgages. Others may be priced out entirely by higher payments.
- Changes in Homebuying Strategy
With rates constantly fluctuating, when buyers make their purchase will be key. Being flexible and watching for opportunities when rates dip briefly will be crucial.
For example, if the Fed signals a pause in rate hikes, buyers may rush in before they ramp up again. Locking when you have the chance will require finesse and foresight.
In essence, homebuyers in 2025 need to brace for impact. Mortgage payments will be notably higher than the ultra-low rates we saw during the pandemic.
This will require compromise - either on budgets, home expectations, or timing strategies. But the desire for homeownership remains strong, so buyers who can adapt will still find a way to make it work.
When Will Mortgage Rates Go Down Again?
Given forecasts of sustained high rates, the big question is - when could we potentially see rates come back down?
Economists expect that mortgage rates are unlikely to fall significantly until:
Inflation falls closer to the Fed’s 2% target. As long as inflation runs hot, the Fed is likely to keep rates high. Moderating inflation relief would enable them to ease up.
The Fed stops raising interest rates. Once the Fed concludes their tightening cycle, upward pressure on rates will fade. Markets could react quickly, pulling rates down.
Housing inventory rises to meet demand. More supply would take pressure off home prices and reduce rate incentives for lenders. But inventory increases aren’t expected until at least 2025.
Barring a recession, most experts don’t anticipate these dynamics will shift dramatically until 2026 or beyond. But there are always unpredictable factors that could change the equation.
The key for buyers is to stay alert and be ready to lock when short-term dips emerge. Sustained low rates may be a thing of the past, but deals can still arise when you’re agile.
Will Rising Rates Impact the Housing Market in Other Ways?
While negative for affordability, there are some potential silver linings to higher mortgage rates for the housing market overall:
1. More Existing Homes Could Come Up For Sale
Homeowners who were reluctant to give up their ultra-low mortgage rate may decide it's time to list their home and take gains as rates rise. This could help ease inventory shortages.
2. Less Competition for Homes
Higher rates will price some buyers out and reduce bidding wars. For buyers still in the market, that means less competition and more room to negotiate.
3. Slowing Home Price Growth
As higher rates curb demand, the rapid home price growth we’ve seen in recent years may begin to ease. This could provide relief for buyers without completely crashing values.
4. Shifting Demand to Lower Priced Markets
Areas that have seen huge price gains due to remote work trends may cool off as higher rates reduce buying power. But more reasonably priced markets could see increased interest.
The bottom line: Don't expect a return to the frenzy of 2020-2021. But the housing market will remain active as motivated buyers adapt to the changing mortgage rate environment.