Will mortgage rates ever be 3% again?
In 2021, the average 30-year mortgage rate fell below 3% — now it’s well over 6%. If you’re in the market for a mortgage loan, you may be wondering if you should wait until interest rates fall significantly before buying a house. When will mortgage rates finally drop back down near the 3% mark?
Read more: Is 2025 a good time to buy a house?
This embedded content is not available in your region.
In this article:
In 2020 and 2021, Americans witnessed record-low mortgage rates. The lowest 30-year fixed rate was 2.65% in January 2021, but rates hovered at or below 3% for roughly a couple of years. However, home loan rates probably won’t drop back down to 3% — at least not anytime soon.
To understand why, let’s look at what initially drove the drastic drop in interest rates and what’s behind the current higher rates.
Home loan interest rates reached historic lows in 2021 as the Federal Reserve aggressively cut rates to mitigate the effects of the COVID-19 pandemic.
The pandemic impacted the economy in several ways, including widespread unemployment and supply shortages. To encourage spending and avoid a major recession, the Fed began lowering the federal funds rate in March 2020, making it cheaper to borrow money as Americans faced job losses.
Although many factors influence home loan rates, mortgage rates typically follow the general direction of the federal funds rate. And by late December 2020, the average rate for a 30-year mortgage was 2.66%.
Dig deeper: How the Federal Reserve rate decision affects mortgage rates
Lower interest rates and pandemic-relief stimulus programs increased consumer demand, one of several factors that drove the inflation rate.
The Federal Reserve monitors this rate, which measures the price change for goods and services, aiming to keep it around 2% according to yearly changes in the price index for personal consumption expenditures (PCE).
By 2022, the PCE inflation rate was over 5%, and the Fed began a series of fed funds rate hikes to curb it. The central bank raised its rate 11 times combined in 2022 and 2023. Mortgage rates followed suit, peaking at 7.79% in October 2023 before hovering around 6.6% at the end of the year.
Many experts expect 30-year mortgage rates to stay between 6% and 7% in 2025, anticipating a slight drop if they fall at all. Rates may decrease more in 2026, but economists still expect them to stay above 6% next year.
Whether we see lower rates depends on several economic factors. Here are just a few.
-
Inflation: Higher inflation can lead to higher mortgage rates if the Federal Reserve responds with a rate hike or even by keeping the fed funds rate unchanged.
-
Unemployment: High unemployment can cause demand for homes to fall, which could lead to lower mortgage rates.
-
10-year Treasury yield: Mortgage rates tend to follow the direction of the 10-year Treasury yield. Unlike the fed funds rate, the 10-year yield is a greater indicator of rates on longer-term loans — like home loans. Generally, investors buy more Treasury bonds as a safety net during economic uncertainty, which lowers yields and, ultimately, mortgage rates.
Buying a home generally makes more sense when it fits your budget and goals than if you try to time the real estate market.
“Finding the right time to buy is not a science, and there are a lot of factors beyond just rates buyers should consider,” said Beverly Hankinson, mortgage loan advisor manager at Frost Bank, via email. “A term that’s become popular is, ‘date the rate, marry the house.’ If the home checks all your boxes, buying could make sense, especially if you can refinance in the future.”
Current homeowners should factor in more than the interest rate when considering a mortgage refinance.
“If you are currently locked into a higher mortgage rate, it could be a good opportunity to explore a refinance,” noted Hankinson. “However, refinancing comes with a cost, so it’s important to weigh your monthly savings against other factors, including how long you plan to stay in your home. For example, if you plan to move for more space in the next two to three years, it might not make sense to pay the refinancing costs.”
Although you can’t control when mortgage rates fall, there are steps you can take to ensure you get the lowest mortgage rate possible.
-
Boost your credit score: You’re more likely to get a lower interest rate with a higher credit score. Improve your score by making on-time payments on credit cards and other debts and resolving errors on your report.
-
Pay down debt: Reducing your debt lowers your debt-to-income ratio (DTI ratio), a factor mortgage lenders consider when determining your loan eligibility and what rate you qualify for.
-
Compare multiple lenders: Apply for preapproval with more than one mortgage lender to compare interest rates, repayment terms, and discounts.
-
Negotiate fees: Pay attention to closing costs and ask your loan advisor if there’s an opportunity to waive or reduce some fees.
It’s unlikely you’ll see a 3% mortgage rate anytime soon. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage is well over 6%. Mortgage rates hit historic lows in 2021 due to the Federal Reserve’s response to the COVID-19 pandemic.
Some experts say mortgage rates will fall slightly in 2025, but don’t expect a significant drop in 30-year fixed-rate mortgages, which have hovered around 6% to 7% since fall 2022.
Timing the housing market can be difficult, especially when so many factors go into buying a home or refinancing. Generally, you should buy a house when you find the right one and it makes financial sense — you have enough saved for the down payment and can afford the monthly mortgage. Refinance when you can lower your interest rate or land better loan terms, like moving from an adjustable-rate to a fixed-rate mortgage.
This article was edited by Laura Grace Tarpley.
Source link
