On a normal day, it’s nearly impossible to predict which way mortgage rates will go. Now, with so much uncertainty in financial markets, mortgage rates could see more spikes and volatility, particularly following the Jan. 20 presidential inauguration.
Earlier this month, the average rate on a 30-year fixed mortgage jumped above 7% and has yet to come down.
Multiple factors drove rates up recently. Robust economic data lowered expectations for the Federal Reserve’s interest rate cuts, prompting 10-year Treasury yields (a key benchmark for home loan rates) to surge. The mortgage market was also rattled over concerns that Donald Trump’s incoming administration will stoke inflation and increase government debt deficits.
Over the next few weeks, a lot will depend on what the president-elect says and does when he takes office, said Jacob Channel, senior economist at LendingTree. If Trump declares an economic emergency to impose tariffs or starts a war with Denmark, for example, mortgage rates would move even higher.
“Unless the president-elect’s tone becomes much more moderate and disciplined once he takes office, expect volatility to remain prevalent,” said Channel.
Following Trump’s inauguration, the Federal Reserve will hold its first policy meeting of the year. Though economists believe the Fed won’t raise or lower interest rates on Jan. 29, investors will be looking for any signals to inform their risk assessment and trading strategy, all of which could impact the direction of mortgage rates.
Mortgage rate volatility in 2025
Based on the current situation, a significant drop in mortgage rates before the spring homebuying season is unlikely, according to Valerie Saunders, chief executive strategist at the National Association of Mortgage Brokers.
It would take a sudden economic shock, such as the onset of a recession or spike in oil prices, to see a sharp downturn in rates. “Drastic changes in direction are usually the result of some emerging significant event somewhere that upends financial markets,” said Keith Gumbinger, vice president of mortgage site HSH.com.
Still, the geopolitical outlook, the job market and inflation data have the power to alter mortgage forecasts.
For now, aside from day-to-day fluctuations, mortgage rates are expected to cruise around 7% for the next few months. If inflation continues to cool and the Fed is able to carry out two 0.25% cuts this year, experts say mortgage rates could inch down closer to 6.25% eventually.
Federal Reserve Governor Christopher Waller said Thursday that he is optimistic about inflation easing, which would allow the central bank to continue on the path to lowering interest rates in the first half of 2025. The central bank made three interest rate cuts in 2024, and investors are now betting on another rate reduction in June or July.
While the Fed influences the direction of overall borrowing rates, it doesn’t directly control the mortgage market. In fact, market forces often move in anticipation of the Fed’s policy moves, relying on economic data and projections to price their expectations in the bond market.
“Because the rise in bond yields is due to the anticipation of future events, if the narrative changes, bond yields could shift,” said Kara Ng, senior economist at Zillow.
A look at the 2025 housing market
Today’s unaffordable housing market results from high mortgage rates, a long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation.
🏠 Low housing inventory: A balanced housing market typically has five to six months of supply. Most markets today average around half that amount. According to Freddie Mac, we still have a shortage of around 3.7 million homes.
🏠 Elevated mortgage rates: In early 2022, mortgage rates hit historic lows of around 3%. As inflation surged and the Fed hiked interest rates to tame it, mortgage rates more than doubled. In 2025, mortgage rates are still high, pricing millions of prospective buyers out of the housing market.
🏠 Rate-lock effect: Since the majority of homeowners are locked into mortgage rates below 5%, they’re reluctant to give up their low mortgage rates and have little incentive to list their homes for sale, leaving a dearth of resale inventory.
🏠 High home prices: Although home buying demand has been limited in recent years, home prices remain high because of a lack of inventory. The median US home price was $429,963 in November, up 5.4% on an annual basis, according to Redfin.
🏠 Steep inflation: Inflation means an increase in the cost of basic goods and services, reducing purchasing power. It also impacts mortgage rates: When inflation is high, lenders typically raise interest rates on consumer loans to ensure a profit.
What homebuyers should know
It’s never a good idea to rush into buying a home without knowing what you can afford, so establish a clear home-buying budget. Here’s what experts recommend before purchasing a home:
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider renting. Choosing to rent or buy a home isn’t just comparing monthly rent to a mortgage payment. Renting offers flexibility and lower upfront costs, but buying allows you to build wealth and have more control over your housing costs.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
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