Inflation is hovering higher than hoped, and the Federal Reserve looks less likely to lower its benchmark rate, factors that mean mortgage rates aren’t likely to move much this month. However, a slowing economy and new post-election uncertainty could push mortgage rates down a bit in March, mortgage insiders say.
“Recent economic data has pointed to a cooling U.S. economy, and bond yields have tumbled to their lowest level in three months,” says Melissa Cohn of William Raveis Mortgage. “Additional concerns that massive layoffs and spending cuts in the federal government will cause a rapid downshift in economic activity have led many to believe that the economy is about to have the rug pulled out from underneath it, which will cause rates to continue to fall.”
For months, mortgage rates have been held aloft by the combination of a still-strong economy, inflation fears and growing concerns about a rising federal deficit.
So much for hopes that mortgage rates were headed back into the 5 percent range. The average 30-year mortgage rate began declining from 7 percent last summer, fell to as low as 6.2 percent in September, then quickly reversed course, tracking back above 7 percent by the end of 2024, according to Bankrate’s weekly lender survey. However, as of Feb. 26, rates had fallen to 6.84 percent, their lowest level of the young year.
The Federal Reserve doesn’t directly set mortgage prices, but the central bank does influence them. The Fed cut its benchmark rate three times last year, but it held steady at its January meeting.
The possibility of sub-6 percent mortgage has grown fainter. Fannie Mae predicts rates will edge down to 6.6 percent by the end of the year, while the Mortgage Bankers Association expects 30-year rates will decrease to 6.5 percent by the end of 2025.
“I don’t think we’re going to see mortgage rates fall as everyone hoped,” says Lisa Sturtevant, chief economist at Bright MLS, a large listing service in the Mid-Atlantic region. “It feels like rates are going to be well in the 6s. But that might not be as big an obstacle as we might have thought. There’s this anchoring going on where buyers and sellers are getting used to 7.”
Higher mortgage rates have kept homeowners clinging to lower-cost loans, a trend known as the “lock-in effect.” Meanwhile, the median national home price clocked in at $396,900 in January, according to the National Association of Realtors.
Bankrate’s weekly mortgage rate averages differ slightly from the statistics reported by Freddie Mac, the government-sponsored enterprise that buys mortgages and packages them as securities. Bankrate’s rates tend to be higher because they include origination points and other costs, while Freddie Mac removes those figures and reports them separately. However, both Bankrate and Freddie Mac report similar overall trends in mortgage rates.
Improve your credit score. A lower credit score won’t prevent you from getting a loan, but it can make all the difference between getting the lowest possible rate and more costly borrowing terms. The best mortgage rates go to borrowers with the highest credit scores, usually at least 780.
Save up for a down payment. Putting more money down upfront can help you obtain a lower mortgage rate, and if you have 20 percent, you’ll avoid mortgage insurance, which adds costs to your loan. If you’re a first-time homebuyer and can’t cover a 20 percent down payment, there are loans, grants and programs that can help. The eligibility requirements vary by program, but are often based on factors like your income.
Understand your debt-to-income ratio. Your debt-to-income (DTI) ratio compares how much money you owe to how much money you make, specifically your total monthly debt payments against your gross monthly income. Not sure how to figure out your DTI ratio? Bankrate has a calculator for that.
How are mortgage rates determined?
It might seem like a bank or lender are dictating mortgage terms, but in fact, mortgage rates are not directly set by any one entity. Instead, mortgage rates grow out of a complicated mix of economic factors. Lenders typically set their rates based on the return they need to make a profit after accounting for risks and costs.
The Federal Reserve doesn’t directly set mortgage rates, but it does set the overall tone. The closest proxy for mortgage rates is the 10-year Treasury yield. Historically, the typical 30-year mortgage rate was about 2 percentage points higher than the 10-year Treasury yield. That “spread” has been closer to 3 percentage points as of late.
When should I refinance my mortgage?
Deciding when to refinance is based on many factors. If rates have fallen since you originally took out your mortgage, refinancing might make sense. A refi can also be a good idea if you’ve improved your credit score and could lock in a lower rate. A cash-out refinance can accomplish that as well, plus give you the funds to pay for a home renovation or other expenses.
