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Inflation has been ticking up in recent months, leading Federal Reserve policymakers to dial back their expectations for rate cuts next year. This has pushed mortgage rates up.
Last week, the Fed lowered the federal funds rate by 25 basis points, its third and final cut of 2024. It also released new economic projections, which show that policymakers now expect fewer rate cuts in 2025.
If the Fed only cuts rates once or twice next year, mortgage rates might not drop much. But it depends on how inflation trends.
In November, the PCE price index, the Fed's preferred gauge of inflation, rose 2.4% year over year. This is a slight uptick from the previous month, though it was lower than the forecast of 2.5%. For the Fed to continue lowering the federal funds rate, inflation will need to head back down to the central bank's target rate of 2%.
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 in the upper 6% range, according to Zillow data. Rates increased last month, averaging around 6.56% in November. But they're a bit lower today.
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 around 6%, 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.
Refinance rates have been similar to purchase rates recently, though in some cases they're a bit higher. In November, 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 lowered rates three times in 2024, but it may not cut as much in 2025. This means mortgage rates may only ease a little bit next year.
Mortgage rates started the month a bit lower, but they trended up following the Fed's latest meeting. In the near term, we probably won't see rates go down. But they could drop a bit next year.
Mortgage rates are unlikely to drop back down to the historic lows of 2020 and 2021, when 30-year fixed rates fell below 3%. But rates are expected to continue to ease throughout the next year or two, and it's possible rates could ultimately settle in closer to 6% in the next couple of years.
Most major forecasts expect mortgage rates to go down throughout 2025 as the Fed continues to lower its benchmark rate. But because mortgage rates are influenced by the economy, this forecast could change depending on how the economy evolves in 2025.
