Personal Finance
Mortgage rates aren’t likely to fall any time soon — here’s why
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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 said.
“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.
Mortgage rates at 7% mean a ‘dead’ market
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.
“Anything over 7%, the market is dead,” said Mark Zandi, chief economist at Moody’s. “No one is going to buy.”
Mortgage rates need to get closer to 6% or below to “see the housing market come back to life,” he said.
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, Zandi said. There are underlying forces that “won’t go away quickly,” he said.
“It may very well be the case that mortgage rates push higher before they moderate,” Zandi said.
Why have mortgage rates increased?
The first thing to know: Mortgage rates are tied more closely to the yield on 10-year U.S. Treasury bonds than to the Fed’s benchmark interest rate, said Baker, the founder of Claris Financial Advisors.
Those Treasury yields were about 4.6% as of Tuesday, 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.
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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.
Indeed, 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, Zandi said.
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, Zandi said.
Mortgage rates “probably won’t fall below 6% until 2026, assuming everything goes as expected,” said Joe Seydl, senior markets economist at J.P. Morgan Private Bank.
The mortgage premium is historically high
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Lenders typically price mortgages at a premium over 10-year Treasury yields.
That premium, also known as a “spread,” was about 1.7 percentage points from 1990 to 2019, on average, Seydl said.
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,” Seydl said.
“All told, 2025 is likely to be another year where housing affordability remains severely challenged,” he said.
That higher premium is “exacerbating the housing affordability challenge” for consumers, Seydl said.
The typical 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.
What can consumers do?
In the current housing and mortgage market, financial advisor Baker 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, Baker said.
Don’t subject the savings for a down payment to the whims of the stock market, he said.
“That’s not something you should gamble with in the market,” he said.
Savers can still get a roughly 4% to 5% return from a money market fund, high-yield bank savings account or certificate of deposit, for example.
Some consumers may also wish to get an adjustable rate mortgage instead of a fixed rate mortgage — an approach that may get consumers a better mortgage rate now but could saddle buyers with higher payments later due to fluctuating rates, Baker said.
“You’re taking a gamble,” Baker said.
He doesn’t recommend the approach for someone on a fixed income in retirement, for example, since it’s unlikely there’d be room in their budget to accommodate potentially higher monthly payments in the future, he said.
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