If economic growth is lagging and unemployment is rising, the Fed can lower interest rates to make it cheaper to borrow money. The intent is to spur businesses to invest in projects and hire employees to fulfill projects, which in turn should increase consumer income and spending.
By the end of 2025, McBride predicts that the average 30-year fixed-rate mortgage will fall 0.54 percentage point from its year-end 2024 level (7.04%).
The short answer is: It's highly unlikely we'll see mortgage rates drop back to 3% anytime soon. However, recent inflation numbers point to cooling of the pace of inflation. This will allow the FED to start lowing the FED funds rates soon, most experts predict September will be the first cut.
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The National Association of Home Builders expects the 30-year mortgage rate to decrease to around 6.5% by the end of 2024 and fall below 6% by the end of 2025, according to the group's latest outlook.
Projected Interest Rates in the Next Five Years
ING's interest rate predictions indicate that in 2024, rates will start at 4%, with subsequent cuts to 3.75% in the second quarter, 3.5% in the third, and 3.25% in the final quarter. In 2025, ING predicts a further decline to 3%.
Federal Reserve officials made their third and final rate cut of 2024 at their meeting on Wednesday. They also forecast two fewer rate reductions in 2025 than they had previously expected, as inflation lingers and the economy holds up.
Why mortgage rates won't drop to 2% again. Again, when mortgage rates hit record lows early in the pandemic, the federal funds rate was near zero. Barring another major economic shock, the Fed projects that the federal funds rate will only take modest adjustments downward over the next several years.
The lowest average mortgage rates on record came about when the Federal Reserve lowered the federal funds rate in 2020 and 2021 in response to the pandemic. As a result, the weekly average 30-year, fixed-rate mortgage fell to 2.65%, while the average 15-year, fixed-rate mortgage sunk to 2.10%.
Mortgage rates have tended to fall in response to recent recessions.
Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you. The ideal time to lock your mortgage rate is when interest rates are at their lowest, but this is hard to predict — even for the experts.
At the September 2024 Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) lowered interest rates by 50 basis points, easing monetary policy for the first time in four years due to progress on the Fed's dual mandate. This lowers the interest rate target to a range of 4.75% to 5%.
The group thinks rates could end 2025 at 6.40% and tick down to 6.30% in 2026. The National Association of Realtors: NAR's quarterly outlook has 30-year mortgage rates ending 2024 at 6.1% and bottoming out around 5.8% toward the end of 2025. After that, we could see rates tick back up to 6.1% in 2026.
As the Federal Reserve conducts monetary policy, it influences employment and inflation primarily through using its policy tools to affect overall financial conditions—including the availability and cost of credit in the economy.
If you're looking to refinance your current loan, the national average interest rate for a 30-year fixed refinance is 7.09%, rising 5 basis points over the last seven days. Meanwhile, today's current average 15-year fixed refinance interest rate is 6.37%, up 5 basis points over the last week.
Today's rates seem high compared with the recent 2% rates of the pandemic era. But experts say getting below 3% on a 30-year fixed mortgage is unlikely without a severe economic downturn.
1981: The all-time high for mortgage rates
The average mortgage rate in 1981 was 16.63 percent. And that's just the average — some people paid more. For the week of Oct. 9, 1981, mortgage rates averaged 18.63%, the highest weekly rate on record, and almost five times the 2019 annual rate.
The average rate on a 30-year fixed mortgage surged to 6.85% as of December 26th, 2024, rebounding for the second consecutive week.
The bottom line. Predicting exactly when mortgage rates will hit 5% is difficult. It could happen by late 2025, but market conditions could speed up or delay this timeline. "Some consumers feel rates will drop in the next two to four months [but] that may never happen," says Rathbun.
There is technically no limit to how many times you can refinance your home. If you meet the lender's qualifications and it makes financial sense for your situation, you can refinance as often as you wish. However, just because you have the option to refinance multiple times doesn't mean it's always a wise choice.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable timeframe and continued moderate growth in employment.
Effective Federal Funds Rate is at 4.33%, compared to 4.33% the previous market day and 5.33% last year.
A line chart titled "US federal funds target rate" that tracks the metric over time. The interest rate was lowered 0.25 percentage points in December. U.S. central bankers now project they will make just two quarter-percentage-point rate reductions by the end of 2025.
Therefore, prospective borrowers should anticipate mortgage rates in the low to mid-6% range through the end of 2024." Still, even a small rate reduction can make a big impact due to the large size of most mortgages and the long repayment timeline.