Will Mortgage Rates Go Down In January?

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Mortgage rate predictions February 2025

As inflation stays higher than hoped and the Federal Reserve looks less likely to lower its benchmark rate, mortgage rates aren’t likely to move much this month.

“The Fed has short-term interest rates on hold until we see sustained progress toward 2 percent inflation. If mortgage rates are going to come down, inflation must come down. And lately, it has not,” says Greg McBride, CFA, Bankrate’s chief financial analyst.

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. As of Jan. 29, rates stood at 7.03 percent.

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.

“We expect one additional rate cut later this year, with longer-term rates and mortgage rates expected to remain in a range close to current levels at least until the end of 2025,” says Joel Kan, deputy chief economist at the Mortgage Bankers Association.

Will mortgage interest rates go down again?

The possibility of sub-6 percent mortgage rates keeps growing fainter. Fannie Mae and the Mortgage Bankers Association both predict 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.”

Current mortgage rate trends

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 $404,400 in December, according to the National Association of Realtors.

What to do if you’re getting a mortgage this year

• 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.

FAQ

• 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.