4 mortgage interest rate scenarios that could happen in 2025

Since January 2024, mortgage rates have kept home buyers on their toes with ups and downs. After being around 7% at the start of the year, Interest rates fell briefly in September to a two-year low of 6.15%. This lower mortgage rate gave buyers a glimmer of hope that home buying would now become more affordable – but it was short-lived. Shortly thereafter, interest rates rose again and now average 6.93%, leaving prospective homeowners wondering what to expect in 2025.

While the Federal Reserve has already cut interest rates twice in the last few months and has hinted at it possible tariff reductions The further development of mortgage interest rates next year is unclear. Several factors influence the development of interest rates, such as: Inflation trendsEmployment figures and global events.

Housing market experts therefore see several possible scenarios for the coming year. Understanding these potential pathways – and what drives them – can help you make informed decisions about whether you should jump in now or wait.

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4 mortgage interest rate scenarios that could happen in 2025

“The most plausible scenario for 2025 is a gradual decline in mortgage rates, driven by the Federal Reserve’s possible shift toward looser monetary policy,” said Chris Heller, president of Movoto.com.

Evan Luchaco, home loan specialist at Churchill Mortgage, also expects moderate rate decreases all year round, except during major economic or geopolitical events.

However, Debbie Calixto, head of sales at LoanDepot, warns that “it is still too early to predict what mortgage rates will be (in the future).” Calixto points out that new government policies could have an impact on inflation expectations.

With that in mind, here are four possible scenarios for mortgage rates in 2025 – and what needs to happen for each scenario to come to fruition.

Scenario 1: Continued price stability

In the most stable scenario Mortgage interest rates would remain at current levels until 2025.

Heller explains that this outcome would require careful consideration of the following:

• Stable employment figures
• Inflation is settling near the Fed’s 2% target
• Continuous economic growth without major shocks

Luchaco shares a similar opinion.

“We have to ensure that job creation and unemployment remain at current levels,” says Luchacho.

Under these conditions, the Federal Reserve would likely maintain its current monetary policy. This could allow mortgage rates to remain relatively unchanged.

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Scenario 2: A gradual decline in interest rates

To see a gradual decline in interest rates, “inflation metrics need to show sustained progress, with core inflation consistently below 3%,” Heller says. He adds that stable energy prices and moderate wage growth would give the Fed confidence to cut interest rates over time.

Another important factor to pay attention to is employment trends, according to Luchaco.

“For interest rates to fall at a moderate pace, we need to see an increase in unemployment, a decrease in job creation and a decrease in inflation,” he emphasizes.

Scenario 3: Price volatility continues

Mortgage rates could also continue their upward and downward trend.

“Interest rate volatility will continue if economic uncertainty remains high due to unpredictable geopolitical events, fluctuating inflation or erratic consumer spending,” says Heller.

This scenario could occur if the Fed needs to respond quickly to conflicting signals such as a sharp economic downturn.

Scenario 4: Big interest rate hike or drastic rate cut

Heller says another scenario is a significant interest rate hike when inflation accelerates due to unforeseen disruptions in the global supply chain or rising raw material prices.

“Conversely, a severe recession could lead to drastic interest rate cuts if the Fed needs to stimulate a struggling economy,” he adds.

Is now a good time to lock in a mortgage rate?

“Instead of trying to time the market, focus on your financial preparation,” advises Heller.

He suggests exploring options like Buybacks or Adjustable Rate Mortgages when conditions are unsafe.

Calixto emphasizes that the best time depends more on your circumstances than mortgage rates House prices.

“(Prioritize) finding the right home for your family and securing (realizable) monthly payments (instead of) fixating on interest rates,” she says. “Prices will always (fluctuate), but securing a home that meets your needs and budget (should be your main goal).” You can refinance your mortgage if interest rates go down later.

The end result

While mortgage rates could shift throughout 2025, waiting and relying on a drop in rates could mean missing out on a great home. Luchaco recommends getting pre-approved early if you’re serious about buying a home soon. This way you know exactly what your budget looks like and what you can afford.

LoanDepot’s Calixto recommends checking local market trends and consulting real estate agents and mortgage experts to make an informed decision. Now that you know your budget and options, you can make an offer when you find a home that meets your needs – regardless where the prices are.