Estimated read time: 3-4 minutes
- Mortgage rates reached 6.99% last week, a six-month high, impacting home loan applications.
- Despite Federal Reserve rate cuts, mortgage rates continue to rise, defying expectations.
- Economists predict minor rate declines in 2025, but home prices may increase.
SALT LAKE CITY – Interest rates on home loans for U.S. borrowers kicked off 2025 riding the same upward trend that closed out last year, hitting 6.99% last week, the highest since July 2024 and marking the fourth straight week of increases, according to the latest data from the Mortgage Bankers Association.
The elevated debt service costs for a 30-year fixed-rate mortgage also put more downward pressure on the number of prospective homebuyers as application volume fell 3.7% last week on a seasonally adjusted basis, per the new report. Analysts note applications for mortgage refinancing rose the previous week but remain low compared to the past year of activity.
"Applications decreased last week as rising mortgage rates continued to discourage buyers from entering the market and put a damper on purchase activity," Joel Kan, Mortgage Bankers Association vice president and deputy chief economist, said in a report accompanying the rate update.
"Purchase applications declined for both conventional and government loans and dropped to the slowest weekly pace since February 2024. Refinance applications increased despite higher rates, but the increase was compared to recent low levels and was driven entirely by an increase in VA refinances, which continue to show weekly swings," he said.
After Fed rate cuts, why hasn't mortgage interest moved down?
Potential homebuyers and those who have already purchased a home but financed at a high interest rate have been hoping the Federal Reserve's recent series of cuts to its federal funds rate would help drag down interest rates on mortgage loans, a reasonable expectation based on historic dynamics.
But since the Fed slashed its benchmark intra-bank overnight lending rate by 0.5% in September, the first reduction in four years, and followed up with two additional cuts of 0.25% each in November and December, U.S. mortgage rates have been headed the other direction.
Mortgage rates are impacted by changes the Fed makes to its federal funds interest rates — the interest charged on lending between banks to maintain required reserves based on a percentage of each institution's total deposits — but don't necessarily move up in tandem with rate increases. Sometimes, as has been the case in recent months, they even move in the opposite direction.
Long-term mortgages tend to track the yield on the 10-year Treasury note, which in turn is influenced by a variety of factors. Those include investors' expectations for future inflation and global demand for U.S. Treasury bonds. While mortgage rates plunged in the midst of the pandemic and were hovering around 2% in late 2021, the rates tracked up alongside the Fed's series of 11 hikes to its federal funds rate.
The yield rate on 10-year U.S. Treasury notes has been on its own upward trend after hitting 3.65% in September. As of midday Wednesday, that rate stood at just over 4.7%.
Lower rates may not lead to better deals
While most economists believe mortgage rates will move down over the course of 2025, those declines aren't expected to be very significant.
"Even by the end of next year, it's hard to see sub-6% mortgage rates," said Mark Fleming, chief economist at First American, which predicts the average rate on a 30-year mortgage will range between 6% and 6.5% next year, per a report from The Hill.
Even if rates head down in the coming months, real estate experts say home prices are likely to move up, potentially eliminating any potential cost savings for buyers holding out for lower interest.
"Generally, we expect mortgage rates to ease and home prices to tick higher in the coming year, resulting in very little, if any, change in the cost to purchase a home," said Hannah Jones, Realtor.com senior economic research analyst, per The Hill.
