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The average 30-year mortgage rate at the time of this writing is 6.47%. Considering that rates were sitting at over 7% back in April, that's an improvement. But many would-be home buyers are hoping that mortgages will become even more affordable over time.
To that end, I may have good news. I predict that it's going to be considerably less expensive to sign a mortgage in 2025 than it is today. And that's not just my optimistic nature talking. There's a reason I expect rates to go down, and pretty soon.
The Fed is about to take action
The reason it's gotten so expensive to borrow money across the board is that the Federal Reserve's benchmark interest rate, known as the federal funds rate, is sitting at a 23-year high. The Fed had to raise that interest rate numerous times in 2022 and 2023 in response to soaring inflation.
But now that inflation is cooling off, the Fed has indicated that it should soon be ready to move forward with its first rate cut. And from there, additional cuts should follow.
Now remember, the Fed doesn't set mortgage rates. It doesn't set any consumer borrowing rates, for that matter. But when the Fed raises its benchmark interest rate, borrowing costs commonly rise. And when that rate gets lowered, borrowing costs tend to fall. So all told, there's reason to be hopeful that once the Fed gets into rate-cutting mode, mortgages will become more affordable.
How low will mortgage rates go in 2025?
That's a bit harder to predict.
The Fed is expected to cut rates gradually. So mortgage rates might still be above 6% at the start of 2025. But in the course of the year, they could easily continue to fall.
Nobody should expect the return of the 3% mortgage rates home buyers were seeing in 2020 and 2021. But mortgage rates could fall into the 5% range in 2025, which is far better than where they're sitting right now. We could even see mortgage rates drop below 5%, though that would be a more likely scenario for the later part of 2025.
How to set yourself up for an even more affordable mortgage
Once mortgage rates start to fall, you may find that it's easier to snag one that's more competitive than the offers you're seeing now. But there are also steps you can take to increase your chances of qualifying for a better mortgage rate.
For one thing, work on boosting your credit score, because the higher that number is, the lower a mortgage rate you might be eligible for. You can raise your credit score by paying bills on time and reducing your current credit card balances.
And speaking of reducing debt, another smart thing to do is to whittle yours down to lower your debt-to-income ratio. That ratio measures how much money you owe each month relative to your income. And it's a number mortgage lenders look at when reviewing applications and assigning borrowing rates.
Although 2024 has been a very tough year for home buyers because of elevated mortgage rates, things could turn around in 2025. Do your part to increase your chances of snagging a lower mortgage rate so you can reap even more savings.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy .
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