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Real estate is cyclical. Out-of-reach mortgage interest rates characterize the mid-2020s. They’re so high that they’ve eclipsed the most expensive cost of debt seen throughout the mid-2000s housing bubble. Financial pundits believe mortgage rates will continue to go down in 2025 after peaking in the third quarter of 2023. However, will they drop low enough to render homes more affordable for most?
What Causes Mortgage Rates to Move
Most experts agree that the current mortgage rates will decline in the long term. However, they’ll fluctuate in the near term.
Projections may be scientific, but reality can be uncertain. The factors that drive mortgage prices up are the same factors that will drive them down. Familiarize yourself with these variables to forecast when rates may fall within your target range.
Economic Growth
When the national economy is doing well, mortgage interest rates usually increase. Steady job growth, a high employment rate and rising incomes fuel consumer spending, helping interested home buyers to save and afford monthly home loan payments.
Investors feel confident in parking capital in bond markets and holding mortgage-backed securities. They want higher yields, driving up home loan prices for consumers.
When the economy is down, interest rates go in the same direction. Fewer people have the means and will to buy properties and investors gravitate toward assets with more promising returns.
Inflation
This phenomenon happens when demand outpaces supply. Housing inventory can indicate this imbalance.
Real estate players calculate housing inventory by dividing the total number of active listings and pending sales at the end of a month by the count of recently sold homes in the previous month. The inventory is low when the answer is four or below and high when it’s six or above.
Low inventory can trigger bidding wars because the most aggressive buyers with the deepest pockets will overpay, inflating prices.
Monetary Policy
The role of a country’s central bank is to ensure the gross domestic product grows steadily and the inflation rate stays low. They indirectly nudge home loan prices in a specific direction by making it cheap or expensive for mortgage lenders to borrow money.
For instance, the Federal Reserve raised interest rates 11 times from early 2022 to mid-2023 to cool the United States economy and ease inflation.
Treasury Bond Performance
In the U.S., Fannie Mae and Freddie Mac buy conforming mortgages from lenders, package them as mortgage-backed securities and sell them as bonds. Investors demand returns to go over the yields on 10-year Treasuries to offset the risk they have to take to hold them, influencing 15-, 30- and 40-year mortgage rates.
Housing Policies
Federal, state and municipal government policies promoting homeownership can result in higher or lower mortgage rates because they affect housing supply and demand dynamics.
World Events
High-profile elections, large-scale conflicts, widespread health crises and devastating natural calamities are some global events that can impact mortgage pricing.
6 Tips for Qualifying for the Lowest Current Mortgage Rates
As of December 2024, the 30-year fixed-rate mortgage rates are still some of the highest recorded in the 21st century. However, with these six tips, you can find the most favorable ones sooner instead of waiting for them to dip below the 3% territory.
1. Improve Your Creditworthiness
Your credit scores speak volumes about your capacity to pay and integrity as a borrower.
The three most crucial components of FICO scores are payment history, credit utilization and length of credit history. Knowing this, you should settle your bills fully and punctually, keep your debt levels low and keep your oldest credit card accounts active. This way, you can build your credit more quickly.
If you succeed, you can move to a higher credit range, minimize debt-to-income ratios and keep your credit history long.
The three major credit-reporting agencies — Experian, Equifax and TransUnion — will give you a copy of your credit reports for free once annually. However, they may charge a fee for your credit scores.
Don’t focus on just one credit bureau. The three use distinct FICO Score versions, so expect different credit scores. Mortgage lenders look at all of them and choose the middle score to determine your mortgage rate.
2. Choose a Cheaper Property
Your chosen house’s selling price affects your loan amount. The more cash you intend to borrow, the riskier it is for the lender. More risk justifies higher interest.
3. Select a Shorter Term
If you can afford higher monthly mortgage payments, apply for a shorter loan term. Compared to 30-year mortgage rates, 15-year ones are lower because lenders want to incentivize borrowers willing to pay what they owe in less time.
In a fixed-rate home loan, higher monthly mortgage payments allow debt holders to wait less to collect most of the interest because most of the initial installments go toward it, not the principal. The sooner mortgage holders get paid, the more quickly they can reinvest their capital to beat inflation.
4. Take Out an Adjustable-Rate Mortgage (ARM)
ARMs’ interest rates are subject to change after an initial fixed period. They lack the predictability of full-fledged fixed-rate mortgages but compensate you with a lower initial rate.
Applying for an ARM can be a good strategy if you sell your house before your mortgage rate’s repricing schedule kicks in. Some borrowers roll the dice, hope interest rates will go down before the adjustment period, and refinance.
5. Explore Nonconventional Loans
Home loan programs insured by the federal government have reduced interest rates because they generally target low- and moderate-income earners. Examples include FHA, USDA and VA mortgages. Lenders deem them less risky because Uncle Sam will cover the unpaid principal balance if you default.
6. Save as Much Cash as You Can
Adequate savings allow you to put down a sizable down payment, reducing your loan amount and making your business less risky. Plenty of dry powder also enables you to cover the closing costs up front or buy a discount point to prepay some interest.
Furthermore, mortgage lenders want to see you have sufficient cash reserves. They need assurance that your bank account is green enough to sustain repayment while losing an income source until you recover financially.
Consider using monetary gifts and grants from government agencies or nonprofits. These funds can cover some of your up-front financial obligations, allowing you to avoid touching your savings.
Mortgage Rates Will Eventually Go Down
What goes up must come down. When it comes to high interest rates, it’s a matter of when, not if. However, pinpointing when they will fall within a specific range in the future is challenging. No crystal ball exists, and expert predictions are not guaranteed. The best you can do is to wait and use the time to improve your credentials to qualify for the most favorable rates when taking out a mortgage.