The average rate on a 30-year fixed mortgage has stayed above 7% for the past week, its highest level in six months.
Soaring borrowing costs led to sharp drops in homebuying throughout 2024, and buyers still aren’t flooding the market. During the first week of the new year, mortgage applications were 15% lower than the same time last year, according to the Mortgage Bankers Association.
Several factors have driven up rates this winter. Strong economic data lowered expectations for the Federal Reserve’s interest rate cuts and caused 10-year Treasury yields (a key benchmark for home loan rates) to surge. Concern that Donald Trump’s incoming administration will stoke inflation and boost government debt deficits has rattled the mortgage market.
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.
Absent a downshift in inflation or a sudden weakening of labor conditions, mortgage rates will remain close to 7% for a while, said Keith Gumbinger, vice president of mortgage site HSH.com.
What will affect mortgage rates this month?
With a lot of uncertainty in financial markets, rates could see major spikes and volatility this month, particularly around the Jan. 20 presidential inauguration.
“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 actually takes office,” said Jacob Channel, senior economist at LendingTree. If Trump declares an economic emergency to impose tariffs or does something like declaring war on Denmark, mortgage rates would move even higher, Channel said.
The week after Trump takes office, the Fed will hold its first policy meeting of the year.
Though 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 shifted with the new administration. The Fed already made three interest rate cuts since September, yet without evidence of lower inflation or a weaker labor market, it could be a while until we see additional reductions.
The Fed influences the direction of overall borrowing rates but doesn’t directly control the mortgage market. Investors care about the Fed’s outlook for rate adjustments because it impacts their trading strategy and risk assessment. That’s why 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.
Mortgage rates could see more volatility in 2025
Aside from typical day-to-day fluctuations, mortgage rates are expected to stay above 6.5% for the next few months. If inflation continues to cool and the Fed is able to carry out two 0.25% cuts, mortgage rates could inch down closer to 6.25% later in the year.
But a new administration, changes in the geopolitical outlook and the risk of inflation rebounding all have the power to alter that forecast dramatically.
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 prevalent,” said Channel.
While a sharp downturn in rates isn’t impossible, it would take a sudden economic shock, such as the onset of a recession or spike in oil prices, for home loan rates to make a U-turn. “Drastic changes in direction are usually the result of some emerging significant event somewhere that upends financial markets,” said Gumbinger.
What is impacting the housing market in 2025?
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.
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 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.
More on today’s housing market
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