Here's How Low Mortgage Rates Could Go in 2025

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The 30-year mortgage rate in the United States averaged about 7% as of mid-July 2024. This was more than twice the average rate at the beginning of 2022, and higher rates have made it much less affordable to buy a home.

However, there could finally be a light at the end of the tunnel. The Federal Reserve is expected to start lowering benchmark interest rates later this year. While this won't directly impact mortgage rates offered by lenders , they are likely to decline as a result.

Here's a rundown of the latest expectations and what they could mean for home buyers.

The latest interest rate expectations

To be sure, plenty of experts and agencies make interest rate predictions, so the exact expectations depend on who you ask. With that in mind, here are some of the latest projections for benchmark interest rates and mortgage interest rates.

First, investors are pricing in a median expectation of three Federal Reserve rate cuts in 2024, with the first one widely expected in September, and at least another three or four in 2025. So, we can reasonably expect the benchmark federal funds rate to be about 1.5 percentage points lower than it is today. (Note: One Federal Reserve "rate cut" means a 0.25% reduction in the federal funds rate, unless otherwise specified.)

This is highly likely to put downward pressure on mortgage rates . The latest forecast by the Mortgage Bankers Association calls for the average 30-year mortgage rate to decline to 6% by the end of 2025. For context, the exact 30-year mortgage rate average as of this writing is 6.55%.

In a nutshell, mortgage rates are expected to decline, but not by as much as many people hope they will.

What it could mean for home buyers

If mortgage rates were to fall to 6% in 2025, it would make buying a home more affordable. For example, the principal and interest payment on a $400,000 mortgage at a 7% interest rate is $2,661. At a 6% interest rate, the payment falls to $2,398.

Not only does this $263 monthly difference make it easier for families to fit the mortgage payment into their budget, but this difference results in nearly $95,000 in interest savings over the life of a 30-year mortgage.

Lower mortgage rates could also make refinancing a viable option for more people. In the first quarter of 2024, about $86 billion worth of mortgages were refinances. This is expected to steadily rise to $154 billion by the fourth quarter of 2025.

One big caveat about mortgage rates

You need to keep in mind that nobody knows exactly what will happen. The predictions discussed are exactly that -- predictions. It's possible that inflation will spike and keep interest rates higher for longer, and it's also possible that the Fed will cut rates more aggressively than expected, which would likely lead to even lower mortgage rates.

Having said that, the most likely trajectory for mortgage rates over the next couple of years is lower. While the 3% mortgage rates of 2021 aren't likely to make a comeback anytime soon, there could finally be relief in sight for people looking to buy or refinance a home.

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