If you’re like many prospective home buyers who have been watching mortgage interest rates and waiting for them to drop, you might be surprised the Fed’s rate cuts didn’t affect home loans much this fall. It’s a common misconception that when the Federal Reserve lowers rates, mortgage rates follow suit. The truth is, there’s a lot more going on behind the scenes. Let’s break it down and discuss why this disconnect happens—and how it will affect your home-buying plans in 2025.
What It Means When the Fed Cuts Rates
In September, the Federal Reserve announced a 50-basis point cut. Another drop of 25 basis points followed in early November. These cuts marked the first time in two years that the Fed cut rates as the US economy finally showed signs that the job market was softening and inflation cooling.
When the Fed announces a rate cut, it primarily affects the federal funds rate—the interest rate banks charge each other for overnight loans. However, mortgage rates are influenced by other factors that tend to reflect broader economic trends and investor sentiment. This is why, although we saw the Fed cut rates twice this fall, it didn’t have a one-to-one correlation with mortgage interest rates.
Factors That Influence Mortgage Interest Rates
What really drives mortgage rates? It’s a mix of factors that go beyond the Federal Reserve’s rate decisions. Mortgage rates are closely tied to the performance of the 10-year Treasury note, which reflects investor confidence in the economy. When inflation is high, investors demand higher returns on bonds, which pushes mortgage rates up. Economic growth, unemployment rates, and demand for mortgage-backed securities also play a role. Right now, lingering inflation and economic uncertainty are keeping mortgage rates elevated, though, at writing, they are down from where they were one year ago in late 2023.
What to Expect from Mortgage Interest Rates in 2025
Planning to buy your first home or your next home in 2025? Many economic experts predict mortgage rates will be in the 6% range over the course of the year. However, the change in the administration and potential new economic policies could influence where rates go.
It’s important to understand that the best time to buy a home is when you’re ready, rather than trying to time the market. Owning a home allows you to build equity and create future wealth. If you’re renting, you’re continuing to help someone else grow their bottom line. If you currently own a property that’s no longer the right fit, securing a new property that does suit your needs will likely contribute to increased quality of life.
Although mortgage rates may not be dropping as quickly as you’d hoped, that doesn’t mean your dream home is out of reach. Whether you’re ready to start house hunting or just want to explore your options, we’re here to provide personalized advice and help you build a plan that works for your budget. Reach out today, and let’s make your 2025 home-buying goals a reality!
