On Monday, the average rate on a 30-year fixed mortgage was around 6.92%, according to Bankrate data, which is 0.19% lower than January’s peak of 7.11%. Where rates go next hinges on the upcoming inflation report.
Last week, fresh labor data and ongoing news on tariffs were the key economic factors affecting rates. This week centers on inflation with January’s Consumer Price Index set to be released on Wednesday morning. The big question is how that figure will influence the Federal Reserve’s decisions about interest rates this year. The central bank recently announced a pause from the rate-cutting path it kicked off last fall in order to observe incoming economic data.
If inflation shows signs of improvement, the Fed could cut rates as early as March, said Rob Cook of Discover Home Loans. “However, the more likely outcome is that rates will stay near current levels for most of 2025,” said Cook.
The most recent employment report from the Bureau of Labor Statistics showed lower-than-expected unemployment. Meanwhile, economists are rightly concerned that President Donald Trump’s threats to place sweeping tariffs on an array of US imports will increase consumer prices. Tariffs are also expected to negatively impact housing affordability, putting upward pressure on borrowing rates and the cost of building materials, like lumber, used to build new homes.
The direction of mortgage rates ultimately depends on the economic impact of policies enacted by the Trump administration and the projected pace of interest rate cuts by the central bank. “Markets will take their biggest cues from actual changes in economic data,” said Matt Graham of Mortgage News Daily.
If the labor market weakens with higher unemployment figures, or inflation nosedives, it could push bond yields down, translating to lower mortgage rates. Most economic forecasts call for a gradual decline in mortgage rates over the course of 2025, but not by much. Fannie Mae expects average 30-year fixed mortgage rates to hold above 6.5% until mid-2025.
The impact of the Fed on mortgage rates
On Jan. 29, the Federal Reserve’s decision-making body voted to pause its cuts on borrowing rates, leaving its benchmark interest rate unchanged. Fed Chair Jerome Powell said officials are waiting to see if inflation eases or the labor market softens and aren’t hurrying to lower interest rates.
As of now, experts project one or two rate cuts this year. “There is a lot of change happening at the beginning of the new presidential term, and depending on policy, we could see inflation turn upward,” said Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage.
The Fed typically responds to high levels of inflation by hiking interest rates to slow the economy, as it did starting in early 2022.
Though the Fed’s monetary policy decisions only indirectly impact the mortgage market, higher inflation and steeper interest rates usually translate to more expensive mortgages for borrowers.
Despite the president’s claims that he would bring mortgage rates down to 3%, the White House doesn’t set rates on home loans. Moreover, those kinds of rock-bottom pandemic-era rates would normally indicate that the country is in a severe economic crisis.
Projections for the 2025 housing market
If Trump’s policies recharge inflation or boost government debt deficits, more affordable mortgages and housing will be difficult to achieve, particularly in time for the spring homebuying season. Here is where some of the major housing authorities expect mortgage rates to land this year.
Even if mortgage rates do eventually come down, prospective homebuyers will still have to grapple with a long-standing housing shortage, expensive home prices and a loss of purchasing power due to inflation.
Expert tips for homebuyers
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.
