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The Federal Reserve may not lower the federal funds rate as much as expected next year, which means mortgage rates may only ease moderately in 2025.
On Wednesday, the Fed announced a quarter-point cut to its benchmark rate, marking the third consecutive rate cut since September. It also released new economic projections for the first time since September, suggesting that the central bank will take a more conservative approach to lowering rates in the new year.
Initially, Fed policymakers expected to cut rates four times in 2025. But the latest update to their projections suggests we may only get two cuts next year.
Mortgage rates are expected to go down as inflation cools and the Fed continues lowering the federal funds rate. But inflation has remained elevated slightly above the Fed's target rate and ticked up in recent months. This means central bankers are probably going to wait and see how inflation trends in 2025 before deciding if further cuts are appropriate. So borrowers shouldn't expect mortgage rates to go down much in the near term, and they may only drop a little bit next year.
Use our free mortgage calculator to see how today's interest rates will affect your monthly payments:
By clicking on "More details," you'll also see how much you'll pay over the entire length of your mortgage, including how much goes toward the principal vs. interest.
Average 30-year mortgage rates are hovering above 6.50%, according to Zillow data. In November, 30-year rates averaged 6.56%.
The 30-year fixed-rate mortgage is the most popular home loan. With this type of mortgage, you'll pay back what you borrowed over 30 years, and your interest rate won't change for the life of the loan.
The lengthy 30-year term allows you to spread out your payments over a long period of time, meaning you can keep your monthly payments lower and more manageable. The trade-off is that you'll have a higher rate than you would with shorter terms, like a 15-year mortgage.
Average 15-year mortgage rates are in the high 5% range, according to Zillow data. In November, 15-year rates averaged 5.92%.
If you want the predictability that comes with a fixed rate but are looking to spend less on interest over the life of your loan, a 15-year fixed-rate mortgage might be a good fit for you. Because these terms are shorter and have lower rates than 30-year fixed-rate mortgages, you could potentially save tens of thousands of dollars in interest. However, you'll have a higher monthly payment than you would with a longer term.
Rates on adjustable-rate mortgages are a bit higher than fixed rates right now. In November, the average mortgage rate for a 7/1 ARM was 6.82%, while the average rate for a 5/1 ARM was 6.83%, according to Zillow data.
When you get an ARM, you'll have a fixed mortgage rate for a certain period of time, after which your rate will adjust periodically. On a 7/1 ARM, for example, your rate will stay fixed for seven years, and then adjust once a year after that until you pay off the loan or refinance.
ARM rates are often (but not always) lower than their fixed-rate counterparts, making an ARM a good deal if you're looking to save on your monthly mortgage payment. But the risk with an ARM is that your monthly payment could increase if rates are up when your rate starts adjusting.
FHA interest rates were 5.41% in November, but they've remained around 5.60% so far this month.
FHA loans are insured by the Federal Housing Administration. This federal backing allows lenders to work with borrowers with lower credit scores and less money for a down payment, making these loans a good option for low-income and first-time homebuyers. They also typically have lower rates compared to conventional mortgages.
To get an FHA loan, you'll need a credit score of at least 580 and a down payment of 3.5%. If you can afford to put 10% down on a house, you could qualify for an FHA loan with a score down to 500, though not all lenders offer this option.
Current VA mortgage rates are in the high 5% range, according to Zillow data. Last month, VA rates averaged 5.97%.
VA loans are available to veterans and military members who meet minimum service requirements. They're backed by the Department of Veterans Affairs, and require no down payment or mortgage insurance.
Refinance rates have been comparable to purchase rates recently. Last month, 30-year refinance rates averaged 6.62%, while 15-year refinance rates were around 5.96%.
If you're wondering if you should refinance now, you'll need to crunch the numbers to see if it makes sense. Some experts advise only refinancing if you can reduce your rate by a percentage point or more, but it really comes down to whether it works for your individual circumstances.
If you can save enough each month by refinancing that you can recoup your costs in a reasonable amount of time, it might be worth it. You can calculate this by dividing your closing costs by the amount you're saving on your monthly mortgage payment. So, if you paid $3,000 to refinance and were able to lower your monthly payment by $200, it would take you 15 months to break even on your refinance.
Here's how 30-year and 15-year mortgage rates have trended over the last five years, according to Freddie Mac data.
Mortgage rates are determined by a variety of different factors, including larger economic trends, Federal Reserve policy, your state's current mortgage rates, the type of loan you're getting, and your personal financial profile.
While many of these factors are out of your control, you can work on improving your credit score, paying off debt, and saving for a larger down payment to ensure you get the best rate possible.
The Fed increased the federal funds rate dramatically in 2022 and 2023 to try to slow economic growth and get inflation under control. Inflation has since slowed significantly, but it's still a bit above the Fed's 2% target rate.
Mortgage rates aren't directly impacted by changes to the federal funds rate, but they often trend up or down ahead of Fed policy moves. This is because mortgage rates change based on investor demand for mortgage-backed securities, and this demand is often impacted by how investors expect Fed policy to affect the broader economy.
The Fed has started lowering rates, but mortgage rates remain elevated thanks to uncertainty around how inflation will trend in the coming months and years.
Mortgage rates are expected to go down in 2025, but they may not drop much further this year.
Mortgage rates started ticking up from historic lows in the second half of 2021 and increased dramatically in 2022 and throughout most of 2023. But now that inflation has decelerated and the Fed has started cutting rates, mortgage rates are expected to ease. In the last 12 months, the consumer price index rose by 2.6%. This is a significant slowdown compared to when it peaked at 9.1% in 2022.
How much rates go down depends on how the economy evolves. If economic conditions remain stable, mortgage rates may not fall as much. But if the labor market weakens and the Fed has to cut rates more aggressively, we could see rates drop substantially.
Rates are unlikely to drop back down to the historic lows of 2020 and 2021, when 30-year fixed rates fell below 3%. But we could see them settle in closer to 6% in the next couple of years.
We aren't likely to see home prices drop soon. In fact, they'll probably rise. The current supply of homes is historically low, which puts a lot of upward pressure on prices.
Fannie Mae researchers expect prices to increase 5.8% in 2024 and 3.6% in 2025, while the Mortgage Bankers Association expects a 3.8% increase in 2024 and a 1.5% increase in 2025.
A mortgage calculator like the one above can help you determine how much house you can afford. Play around with different home prices and down payment amounts to see how much your monthly payment could be, and think about how that fits in with your overall budget.
Experts often recommend spending no more than 28% of your gross monthly income on housing expenses. This means your entire monthly mortgage payment, including taxes and insurance, shouldn't exceed 28% of your pre-tax monthly income. But you should take a holistic look at your budget and see how a mortgage payment fits into that, so you aren't relying solely on rules of thumb.
The lower your rate, the more you'll be able to borrow, so shop around and get preapproved with multiple mortgage lenders to see who can offer you the best rate. But remember not to borrow more than what your budget can comfortably handle.
