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Mortgage rates have fallen quite a bit since the late-2023 peak. According to the latest data from the Mortgage Bankers Association, the average interest rate on a 30-year fixed-rate mortgage is now 6.29%.
However, with the Federal Reserve widely expected to gradually cut the federal funds rate through at least the end of 2025, there's a solid probability that prospective home buyers will get a chance to buy with even lower mortgage rates in the near future.
Nobody can predict with any degree of certainty what mortgage rates will be at any point in the future. However, we can look at future interest rate expectations and historical mortgage rate trends to take an educated guess -- so let's do that.
Expectations for Fed rate cuts
Let's start with the latest expectations for the Federal Reserve's rate cuts. As of this writing, the target range for the benchmark federal funds rate is set at 5.25%–5.50%. The Fed is expected to start lowering this for the first time since 2020 later in September, and to continue to gradually cut rates through at least the end of 2025.
Here are the latest expectations being priced into financial markets:
- At the start of 2025, a federal funds rate target range of 4.25%–4.5%, or one full percentage point lower than the current range.
- At the end of 2025, a federal funds rate target range of 2.75%–3.00%, or 2.5 percentage points lower than the current range.
Now, there is no guarantee this will actually happen, and if history is any indicator, these probably won't be 100% accurate, especially the projection for the end of 2025 (a lot can happen economically between now and then). But we'll use those as a guideline.
Mortgage rate spreads
The next piece of the puzzle is the mortgage rate spread, which is the difference between mortgage rates and benchmark interest rates. There are several different benchmarks we could look at, including the federal funds rate. Some industry experts use the 10-year Treasury yield as a good mortgage indicator, as it tends to move up and down in tandem with the average mortgage rate.
The current spread between the 10-year Treasury yield and the average 30-year mortgage rate is about 2.6 percentage points. And while it has varied a bit, it has been fairly constant throughout the past couple of years.
While nobody has a crystal ball that can predict future Treasury yields, one example is that data from Statista projects a 3.39% yield on the 10-year Treasury at the start of 2025. A separate projection from the Financial Forecast Center projects that the falling interest rate environment discussed earlier will result in a 3.37% 10-year yield in January 2025, falling rapidly to about 2.11% by mid-year.
I tend to view the latter figure as rather aggressive, and personally see the 10-year gravitating toward the 2.5% range by the end of 2025, which is right around where it was in 2019 when the federal funds rate was at a 2.25%–2.50% target range.
The prediction: Where will mortgage rates be in 2025?
Let's put it together. Based on the projected interest rate trajectory and my expectations for Treasury yields, as well as typical mortgage rate spreads, here's what I predict for 2025:
- In January 2025, I predict the average 30-year mortgage rate will be about 6%, not too far below where it is right now.
- By December 2025, I predict the average 30-year mortgage rate will fall to approximately 5.1%, which would make a big difference in the cost of homeownership.
Of course, while this is a prediction based on interest rate expectations and historical mortgage rate spreads , it's important to stress that it is just my prediction . There's no way to know for sure what mortgage rates will do, and there are other factors -- such as overall loan demand and banks' perception of economic risk -- that can influence them.
Having said that, I'm quite confident that the most likely direction for mortgage rates between now and the end of 2025 will be downward, and many people who want to buy a home or refinance a high mortgage rate will have their chance.
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