Mortgage rates aren’t likely to fall any time soon — here’s why

Mortgage rates have risen in recent months, even as the Federal Reserve has cut interest rates.

While those opposing movements may seem counterintuitive, they’re due to market forces that seem unlikely to ease much in the near term, according to economists and other finance experts.

That may leave prospective homebuyers with a tough choice. They can either delay their home purchase or forge ahead with current mortgage rates. The latter option is complicated by elevated home prices, experts say.

“If what you’re hoping or wishing for is an interest rate at 4%, or housing prices to drop 20%, I personally don’t think either one of those things is remotely likely in the near term,” said Lee Baker, a certified financial planner based in Atlanta and a member of CNBC’s Financial Advisor Council.

Rates for a 30-year fixed mortgage jumped above  7% during the week ended Jan. 16, according to Freddie Mac. They’ve risen gradually since late September, when they had touched a recent low near 6%.

Current rates represent a bit of whiplash for consumers, who were paying less than 3% for a 30-year fixed mortgage as recently as November 2021, before the Fed raised borrowing costs sharply to tame high U.S. inflation.

Mortgage rates need to get closer to 6% or below to see the housing market come back to life.

The financial calculus shows why: Consumers with a 30-year, $300,000 fixed mortgage at 5% would pay about $1,610 a month in principal and interest, according to a Bankrate analysis. They’d pay about $1,996 — roughly $400 more a month — at 7%, it said.

Meanwhile, the Fed began cutting interest rates in September as inflation has throttled back. The central bank reduced its benchmark rate three times over that period, by a full percentage point.

Despite that Fed policy shift, mortgage rates are unlikely to dip back to 6% until 2026.  There are underlying forces that won’t go away quickly and it may very well be the case that mortgage rates push higher before they moderate.

The first thing to know: Mortgage rates are tied more closely to the yield on 10-year U.S. Treasury bonds than than to the Fed’s benchmark interest rate. Those Treasury yields were about 4.6% as of  last week,  up from about 3.6% in September.

Investors who buy and sell Treasury bonds influence those yields. They appear to have risen in recent months as investors have gotten worried about the inflationary impact of President Donald Trump’s proposed policies, experts said.

Policies like tariffs and mass deportations of immigrants are expected to increase inflation,  if they come to pass, experts said. The Fed may lower borrowing costs more slowly if that happens — and potentially raise them again. experts said.  Fed officials recently cited “upside risks” to inflation because of the potential effects of changes to trade and immigration policy.

Investors are also worried about how a large package of anticipated tax changes under the Trump administration might raise the federal deficit.

There are other factors influencing Treasury yields, too.  For example, the Fed has been reducing its holdings of Treasury bonds and mortgage securities via its quantitative tightening policy, while Chinese investors have “turned more circumspect” in their buying of Treasurys and Japanese investors are less interested as they can now get a return on their own bonds.

Mortgage rates probably won’t fall below 6% until 2026, assuming everything goes as expected.

The current spread is about 2.4 percentage points — roughly 0.7 points higher than the historical average.

There are a few reasons for the higher spread: For example, market volatility had made lenders more conservative in their mortgage underwriting, and that conservatism was exacerbated by the regional banking “shock” in 2023, which caused a severe tightening of lending standards.

All told, 2025 is likely to be another year where housing affordability remains severely challenged.  That higher  premium is exacerbating the housing affordability challenge for consumers.

The typical US homebuyer paid $406,100 for an existing home in November, up 5% from $387,800 a year earlier, according to the National Association of Realtors.

In the current housing and mortgage market, financial advisors suggests consumers ask themselves: Is buying a home the right financial move for me right now? Or will I be a renter instead, at least for the foreseeable future?

Those who want to buy a home should try to put down a “significant” down payment, to reduce the size of their mortgage and help it fit more easily in their monthly budget.