The average rate for a 30-year fixed mortgage hovered above 7% last week, its highest level in six months.
Rising borrowing costs led to sharp declines in home purchases throughout 2024, and buyers are still not flooding the market. According to the Mortgage Bankers Association, during the first week of the new year, mortgage applications were 15% lower than the same period last year.
Several factors have increased rates this winter. Strong economic data lowered expectations of a Federal Reserve rate cut and sent 10-year Treasury yields (a key benchmark for home loan rates) rising. Concerns that the incoming Donald Trump administration will fuel inflation and increase government debt deficits have rattled the mortgage market.
Based on the current situation, a significant drop in mortgage rates before the spring home buying season is unlikely, according to Valerie Saunders, chief executive strategist at the National Association of Mortgage Brokers.
Absent a drop in inflation or a sudden weakening of labor conditions, mortgage rates will remain near 7% for a while, said Keith Gumbinger, vice president of mortgage website HSH.com.
What will affect mortgage rates this month?
With so much uncertainty in the financial markets, rates could see big increases and volatility this month, especially around the presidential inauguration on January 20.
“As for whether or not we’ll see recalibration over the next few weeks, that depends on what the president-elect says and what he does when he takes office,” said Jacob Channel, senior economist at LendingTree. If Trump declares an economic emergency to impose tariffs or does something like declare war on Denmark, mortgage rates would rise even more, Channel said.
The week after Trump takes office, the Fed will hold its first policy meeting of the year.
Although economists believe the Fed will leave interest rates unchanged on Jan. 29, investors will be looking for any clues as to how the outlook may have changed under the new administration. The Fed has already cut interest rates three times since September, but without evidence of lower inflation or a weaker labor market, it may be a while before we see additional cuts.
The Fed influences the direction of general borrowing rates, but does not directly control the mortgage market. Investors care about the Fed’s outlook for rate adjustments because it affects their trading strategy and risk assessment. That’s why market forces often move in anticipation of Fed policy moves, relying on economic data and forecasts to gauge their expectations in the bond market.
“Because rising bond yields are due to anticipation of future events, if the narrative changes, bond yields could change,” said Kara Ng, senior economist at Zillow.
Mortgage rates may see more volatility in 2025
Aside from the typical day-to-day fluctuations, mortgage rates are expected to stay above 6.5% for the next several months. If inflation continues to cool and the Fed is able to make two 0.25% cuts, mortgage rates could drop closer to 6.25% later in the year.
But a new administration, changes in the geopolitical outlook and the risk of inflation returning all have the power to dramatically change that forecast.
As investors react to political announcements and policy changes, there won’t be much stability in the mortgage market. “Unless the president-elect’s tone becomes much more moderate and disciplined once he takes office, expect volatility to remain widespread,” Channel said.
While a sharp drop in rates is not impossible, it would take a sudden economic shock, such as the onset of a recession or rising oil prices, for home loan rates to turn around. “Drastic changes in direction are usually the result of some significant event occurring somewhere that overturns the financial markets,” Gumbinger said.
What is influencing the housing market in 2025?
Today’s unaffordable housing market results from high mortgage rates, a persistent housing shortage, expensive home prices, and the 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 about half that amount. According to Freddie Mac, we still have a shortfall of about 3.7 million homes.
🏠 Raised mortgage fees: In early 2022, mortgage rates hit historic lows of around 3%. As inflation rose and the Fed raised interest rates to tame it, mortgage rates more than doubled. In 2025, mortgage rates are still high, driving millions of potential buyers out of the housing market.
🏠 Rate lock effect: Since most homeowners are locked into mortgage rates below 5%, they are reluctant to give up their low mortgage rates and have little incentive to list their homes for sale, leaving a shortage of inventory. resale.
🏠 High house prices: Although home buying demand has been limited in recent years, home prices remain high due to a lack of inventory. The median U.S. home price was $429,963 in November, up 5.4% year over year, according to Redfin.
🏠 Strong inflation: Inflation means an increase in the cost of basic goods and services, reducing purchasing power. It also affects mortgage rates: When inflation is high, lenders typically raise interest rates on consumer loans to ensure a profit.
Is it better to wait or buy?
It’s never a good idea to rush into buying a home without knowing what you can afford, so set a clear home buying budget. Here’s what experts recommend before buying a home:
💰 Build your credit score. Your credit score will help determine if 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 get 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 credit evaluations from different lenders.
💰 Consider renting. Choosing to rent or buy a home isn’t just about 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, where each point costs 1% of the total loan amount. One mortgage point equals a 0.25% reduction in your mortgage rate.
