Mortgage Interest Rate Forecast: When Will Mortgage Rates Go Back Down?

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After more than two years of steady declines, rates for 30-year fixed-rate mortgage loans reached a record low of 2.7% at the end of 2020, according to data from Freddie Mac. By the week ending Oct. 26, 2023, rates had climbed to 7.79%, the highest rate since September 2000. They’ve since dropped to 6.35% as of Aug. 29 — down half a point since July and 0.83% from a year ago.

That drop is of little consolation to homebuyers who’ve had to navigate rising home prices and even faster-rising mortgage rates. How much rates have increased depends in part on where you live.

Recently, GOBankingRates’ analyzed data from the Zillow Home Value Index and the Federal Reserve. Here’s what that data reveals.

Key Takeaways

• Mortgage costs have risen most sharply in Hawaii over the last five years, which saw a 50.4% increase between July 2019 and July 2024.
• That jump drove the average monthly payment in Hawaii from $2,899 to $5,487. During the same period, home prices grew less than half that rate — 71%.
• Washington, D.C., which has nation’s third-highest home prices, and Louisiana had the two lowest five-year increases in mortgage costs, at 36.2% and 37.5% respectively.
• D.C.’s average payment increased from $2,709 to $4,250 and Louisiana’s increased from $762 to $1,219. Home prices in D.C. and in Louisiana grew about 9% and 11%, respectively, during that period.

Will Mortgage Rates Go Down in 2024?

One reason mortgage rates are so high is because the Federal Reserve raised the federal funds rate 11 times between March 17, 2022 and July 26, 2023. Several factors have influenced the increases, but the Fed’s mission to tame inflation has been a major one — The central bank aims to push the inflation rate down 2%.

As of July, the Consumer Price Index, the primary measure of inflation, is 2.9%. That rate is significantly lower than the peak of 9.1% in June 2022. While it falls short of the Fed’s 2% goal, Fed Chairman Jerome Powell hinted at an upcoming rate cut during an Aug. 23 speech to the Kansas City Fed’s economic conference.

“The time has come for policy to adjust,” he said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.

While Powell didn’t specify when the Fed would cut rates or by how much, Fed watchers expect the central bank’s Federal Open Market Committee to announce a 0.25%–approximately 25 basis points–reduction after its meeting scheduled for Sept. 17 and 18. In fact, the CME Group Fed Watch probability tool indicates a 63% chance of a 0.25% cut, to a range of 5.00% to 5.25%. In comparison, the chance of a 0.50% cut to 4.75% to 5.00% is 37%, according to CME.

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Note, that a 0.25% decrease won’t automatically result in a corresponding 0.25% decrease in mortgage rates. Mortgage rates are more closely tied to Treasury bonds. However, changes to the federal funds rate triggers broader rate changes, including for mortgage loans.

Barring unforeseen circumstances, relief is in sight for buyers still sitting on the fence. The downward trend in mortgage rates should continue through the rest of 2024 and into 2025, although experts are not in total agreement as to how low they’ll go.

Mortgage Bankers Association

In its latest Mortgage Finance Forecast dated Aug. 15, the Mortgage Bankers Association’s predictions were unchanged from May, when it predicted that mortgage rates would fall to 6.7% in the third quarter and 6.5% by year’s end.

At 6.35% as of Aug. 29, the average rate is already 0.15% lower than the MBA’s end-of-the-year prediction. But as of Aug. 15, the MBA expected rates to drop from 6.4% in the first quarter of 2025 to 5.9% by the end of the year.

Fannie Mae

Fannie Mae’s Housing Forecast for August predicted that rates would fall slowly through the second half of the year. It forecast an average rate of 6.6% for the third quarter and a 6.4% average in the fourth quarter of the year.

Freddie Mac

Freddie Mac doesn’t offer a specific mortgage interest rate forecast, but it does issue more general guidance. It noted its Aug. 20 U.S. Economic, Housing and Mortgage Market Outlook that moderating inflation is “paving the way” for the Fed to begin cutting rates.

“The anticipation of an upcoming rate cut is already influencing the market, leading to downward pressure on mortgage rates,” its Aug. 20 U.S. Economic, Housing and Mortgage Market Outlook stated. “As a result, we forecast mortgage rates to gradually decline in the coming quarters,” the reported stated.

Realtor.com

Realtor.com Chief Economist Danielle Hale anticipates Fed rate cuts. In an Aug. 14 Trends article on the Realtor.com website, Hale predicted mortgage rates would average 6.3% in the fourth quarter.

Factors That Affect Mortgage Rates

Several factors impact mortgage rates.

The Impact of Inflation on Demand for Homes

Inflation hit 40-year highs in 2022. But it’s slowing, with the July CPI coming in at 2.9%. Shelter is a primary category driving up prices, according to the Bureau of Labor Statistics.

“While inflation doesn’t directly affect mortgage rates, it can indirectly cause mortgage rates to increase,” Amy Shunick, chief financial officer at Bennett, told Rocket Mortgage. “Inflation is the devaluation of the dollar, which means that the purchasing power of your dollar decreases significantly as inflation increases. As inflation increases, so does the price of everything, including mortgage rates.”

While the overall inflation rate is holding steady, increases in the costs of rent and homeownership have tempered growth in demand for homes — and by association, mortgage loans, as Freddie Mac noted in its June 13 Primary Mortgage Markets Survey.

Federal Funds Rate

The federal funds rate is the interest rate banks use to loan each other money. When the federal funds rate increases, banks pay more to borrow, and they pass along some of those costs to consumers by raising mortgage rates.

The Federal Reserve uses federal funds rate increases to tame inflation by discouraging consumers from spending and borrowing, which slows the economy and brings down prices. The rate increased seven times in 2022. That resulted in a total increase of 425 basis points, or 4.25%, between March 17, when the rate stood at 0.25% to 0.50%, and Dec. 15, when it stood at 4.25% to 4.50%.

The funds rate increased by another 25 basis points, to 4.50% to 4.75%, in February 2023. It rose again in March, May and July 2023. The rate currently stands at 5.25% to 5.50%, unchanged since last July.

While federal funds rate hikes result in higher mortgage rates in the short term, they set the stage for lower rates in the long term by reducing inflation. The Fed is watching for inflation to make better progress toward the 2% goal, and it’s weighing the effects on employment to ensure that employment rates stay strong. FOMC members’ median rate forecast calls for a 0.25% cut in September.

How High Will Mortgage Rates Go in 2024?

There’s a good chance that they’re as high as they’ll get in the current economic cycle. It seems highly unlikely that the Fed will increase the federal funds rate this year, and rates have been trending downward. Experts predict this trend to continue. If it does, rates shouldn’t move significantly higher than than the current 6.35%.

Are Mortgage Rates Expected To Drop in 2024?

Yes. However, August predictions from highly authoritative organizations such as the Mortgage Bankers Association and Fannie Mae appear to have understestimated how low rates might fall this year. But it’s also possible that, as Freddie Mac noted, current mortgage rates reflect an anticipated federal funds rate cut. If that’s the case, a 0.25% cut might have little or no additional impact in the short term.

What Is the Mortgage Rate Forecast for the Next 3 and 5 Years?

Economists and analysts rarely make mortgage rate predictions even three years out because many variables determine rates, and those variables are always changing. As a result, any forecast would be purely speculative.

The Mortgage Bankers Association does go out two years, to 2026. It predicts a 5.9% rate by the end of that year. However, its prediction changes monthly and will have changed over two dozen times by the end of 2026.

Is This a Good Time To Lock In a Mortgage Rate?

Mortgage rates haven’t been moving in a straight line. That makes for a tough decision considering that lock-in periods can last 90 days. On the one hand, locking in now protects you from rate increases. On the other, you could pay more than you need to in the event that mortgage rates go down before you close on your loan. But timing the market so that your purchase coincides with expected rate drops can be risky.

Remember that the interest rate isn’t the only thing that impacts the cost of buying a home. Lower rates mean you pay less interest, but they also drive up demand for homes, which increases home prices.

A sound strategy for many buyers, especially the more budget-conscious, is to lock in only after you’ve had an offer accepted on a home. That way, you make a purchase decision based on the big picture in terms of affordability and simply set it in stone by locking the rate.

Should You Refinance Your Mortgage?

Whether it makes sense to refinance now depends on your circumstances. Freddie Mac recommends considering refinancing if it will result in one of the following:

• Reducing your interest rate
• Shortening the term of your loan
• Locking in an adjustable-rate loan that’s about to adjust upward

Consider potential consequences of refinancing before you make the move. For example, refinancing into a loan with a lower rate can actually cost you money if you trade a loan you’ve been paying down for years for a new 30-year mortgage. A shorter-term loan generally has lower rates than a 30-year loan, but the higher principal payments could divert money from other financial priorities, such as paying down high-interest debt.

With any type of refinance, lender fees and closing costs chip away at any savings you stand to gain — even if the loan is advertised as having no fees or closing costs.

Lenders have two ways to offer no-fee/no-closing-cost loans. “One way is by charging you a higher interest rate to cover the cost of making the loan. The other way is by adding the closing costs to your loan amount,” according to the Consumer Financial Protection Bureau. “Both methods involve no cash to close the loan but result in a higher monthly payment.”

How Do Mortgage Rates Affect Home Prices?

Record home prices in the last couple of years were the result of several factors, including record-low mortgage rates, a limited supply of homes for sale, an increase in first-time buyers and migration from expensive cities to areas where homes were already in short supply, according to Freddie Mac. What these factors have in common is their effect on demand for homes.

Higher rates make it harder for consumers to buy, so demand drops — and as demand drops, so do home prices. Low rates like consumers saw in 2020 and 2021 make it easier for buyers to purchase, which increases demand and drives prices up.

As we move forward, prices continue to be influenced by both rates and inventory.

Final Thoughts

A volatile economy might tempt you to make decisions based on how long you expect a rate to last — or what you anticipate the next move to be. Resist the urge. Trying to time the market is rarely a good strategy, whether you’re investing in a home or in the stock market.

Instead, set a budget based on what you can afford when you’re ready to buy. Or, in the case of a refinance, run the numbers through a refinance calculator to get an accurate picture of costs vs. savings, and base your decision on that. In either case, you’ll eliminate the uncertainty around the already-stressful process of buying or refinancing a home.

Sarah Sharkey contributed to the reporting for this article.

Information is accurate as of Sept. 2, 2024.

The article above was refined via automated technology and then fine-tuned and verified for accuracy by a member of our editorial team.

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