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Mortgage Rates in 2025: Will They Drop This Year?

AInvestThursday, Jan 2, 2025 6:06 am ET
4min read


As we step into 2025, the question on many homeowners' and prospective buyers' minds is whether mortgage rates will drop this year. The past year has seen a roller coaster ride for mortgage rates, with the 30-year fixed-rate home loan ranging from a low of 6.08% in September to a high of 7.22% in May. At the time of writing, rates are averaging 6.81%.



The existing mortgage climate is a result of various factors, including the Federal Reserve's interest rate decisions, the housing market's supply and demand dynamics, and geopolitical events. Let's delve into these factors to understand the potential direction of mortgage rates in 2025.

1. Federal Reserve's Monetary Policy: The Federal Reserve's interest rate decisions have a significant impact on mortgage rates. In 2024, the Fed raised interest rates to combat inflation, which led to an increase in mortgage rates. However, the Fed is now expected to cut interest rates in the coming months, which could lead to a decrease in mortgage rates. This is because mortgage rates are closely tied to the movement of the 10-year Treasury yield, which is influenced by the Fed's monetary policy.
2. Housing Market Supply and Demand Dynamics: The housing market's supply and demand dynamics play a crucial role in determining mortgage rate trends. The low inventory of homes for sale has sustained upward pressure on prices, meaning even as rates climbed, affordability has been squeezed further for buyers. This is due to the Fed's consistent rate hikes aimed at curbing inflation, which have pushed borrowing costs higher across the board. The strong demand, coupled with the low inventory, has led to a competitive market where buyers are willing to pay higher prices, even with the increased borrowing costs.
3. Geopolitical Events and Global Economic Conditions: Geopolitical events and global economic conditions can significantly influence U.S. mortgage rates. In 2025, several factors may play a role in shaping mortgage rates, including the policies of the incoming presidential administration, changes in fiscal policy, and global economic trends. The incoming presidential administration's policies are expected to have an impact on the U.S. economy and housing market. Additionally, changes in fiscal policy can impact mortgage rates, as expectations of higher debt and deficits by the incoming administration may keep 10-year treasury yields higher, which can influence mortgage rates. Lastly, global economic trends can also influence U.S. mortgage rates, as a strong U.S. economy relative to other countries can lead to higher interest rates, while a weak global economy can lead to lower interest rates.



In conclusion, mortgage rates in 2025 are expected to be influenced by the Federal Reserve's monetary policy, the housing market's supply and demand dynamics, and geopolitical events. While the Fed's interest rate decisions may lead to a decrease in mortgage rates, the housing market's supply and demand dynamics may put upward pressure on home prices, potentially offsetting the benefits of lower interest rates. Geopolitical events and global economic conditions can also play a significant role in shaping mortgage rates. As such, it is essential to monitor these factors closely to better understand the potential direction of mortgage rates in the coming year.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.