Mortgage rates fell below 7%. Will they go lower?

Interest rates fell below a psychologically daunting barrier, but inflation and the federal deficit spark worries

Mortgage rates fell below 7%. Will they go lower?

Interest rates fell below a psychologically daunting barrier, but inflation and the federal deficit spark worries
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Originators could take comfort last week when mortgage rates inched below the psychologically daunting 7% mark. But don’t count on them falling much more, housing economists told Scotsman Guide.

Most forecasters are still predicting 30-year-fixed rates to bounce around in the mid-6% range this year. Fears of inflation are keeping rates elevated, experts say.

“Mortgage rates are still pushing 7%,” said Joel Kan, deputy chief economist for the Mortgage Bankers Association, in an interview with Scotsman Guide. “It’s challenging doing this from quarter to quarter, but if you look at our forecast for all of 2025, the range of rates that we have are between 6 ½ to 7%.”

Fannie Mae Chief Economist Mark Palim also predicted mortgage rates will fall only marginally, averaging 6.5% this year and slightly higher than he previously predicted.

But Palim told Scotsman Guide last week, “there’s likely to be volatility as there always is day by day, week by week.”  

Mortgage rates have been following the movements of 10-year Treasurys, which rose about 1 percentage point over the year through August and haven’t come down, Palim said. The 10-year Treasury yield was 4.6% as of Friday morning, according to MarketWatch.

The 30-year-fixed mortgage rate is expected to hover around 2 percentage points above the 10-year yields.

“Investors are demanding extra yield to take 10 years of interest rate risk,” Palim said, noting there’s an expectation that the U.S. economy will grow solidly this year, and the Federal Reserve won’t aggressively lower rates. The Fed has signaled “fewer cuts in rates over the next few years,” Palim said.

“Obviously every day (the yield) moves around a little bit, but you’ve seen a meaningful increase in the 10-year and that then translates through to higher mortgage rates,” Palim said.

Kan said the federal deficit is another factor raising fears of inflation and keeping long-term rates high. In 2024, the federal deficit was $1.83 trillion, according to the U.S. Treasury Department. The expectation is that deficit spending will continue under the Trump administration and the national debt will grow, which can cause inflation, Kan said.  

“What’s moved rates higher really is the prospect that our budget deficit is clearly large and likely to be added to no matter who was elected,” Kan said. “So that was inflationary.”

A potential trade war with Canada, Mexico and China, among other countries, could also increase the cost of consumer goods in the U.S. and keep mortgage rates elevated, said Matthew Walsh, Moody’s Analytics housing economist, in an email last week.  

President Donald Trump has threatened to impose a 25% tariff on goods from Canada and Mexico, and a 60% tariff on Chinese goods. The expectation that Trump will impose tariffs and a hardline-immigration policy “caused the recent surge in long-term interest rates and the mortgage rate,” he said.

Despite those fears, Walsh projected that 10-year-Treasury yields would fall slightly and average about 4.5% this year, with the 30-year-fixed mortgage rate averaging below 7%.  That assumes the Fed cuts interest rates twice in 2025.

This week, the 30-year-fixed rate ticked just under the 7% mark, averaging 6.96%, down from 7.04% the previous week, according to Freddie Mac.

MBA’s Kan noted that higher-than-expected rates this year would likely keep refinancing volumes under historic levels, though weekly fluctuations could bring “windows of opportunity.”

“If you have rates in the six-and-a-half percent range, refis are going to continue to be a challenging part of the business,” Kan said.

Author

  • Victor Whitman

    Victor Whitman is a contributing writer for Scotsman Guide and a former editor of the publication’s commercial magazine. 

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