Buyers should keep an eye on the possibility of rate cuts in the next few months.
Mortgage market predictions have been clouded by economic uncertainty caused by the Trump administration's trade measures, deficit spending and geopolitical maneuvering. The big question hanging over the housing market is whether rates will rise due to tariff-induced inflation or fall due to a recession.
Since early spring, average mortgage rates for 30-year fixed loans have been swinging between 6.5% and 7%. Some weeks are volatile in the mortgage market, while others are steadier.
Interest rate cuts by the Federal Reserve could improve housing affordability over the long term, but the direction of mortgage rates ultimately depends on the bond market. Mortgage rates track the 10-year Treasury yield, which rises or falls depending on how inflation and labor data impact investor speculation.
If investors perceive higher risk, including from heightened military conflict, they often flock to "safe-haven" Treasury bonds, which can reduce long-term yields and temporarily push mortgage rates lower.
The Mortgage Bankers Association now predicts that mortgage rates will decline only slightly to 6.7% by the end of the year. Any downward trend in home loan rates could bring more buyers off the sidelines.
"You'd need to see mortgage rates pretty far below current levels, certainly below 6.75%, to incentivize homebuyers," said Beth Ann Bovino, chief economist at U.S. Bank.
How will Fed rate cuts impact mortgage rates?
The Federal Reserve is responsible for ensuring full employment and controlling inflation, mainly by setting short-term interest rates for banks. While a weak economy typically calls for interest rate cuts to boost growth, reducing rates too quickly could worsen inflation if it's already too high.
Though the Fed's policy changes have a ripple effect on all borrowing rates, the central bank doesn't directly set the rates on home loans. In 2024, the Fed cut interest rates three times, but mortgage rates didn't fall.
The market currently projects an interest rate cut in September, though two Fed officials floated the possibility of a July rate cut. Fed Chair Powell has reaffirmed a "wait and see" posture, with concerns over the inflationary impact of tariffs.
Despite widespread pleas for lower consumer borrowing costs, including from the White House, the Fed held interest rates steady for the fourth consecutive time this year at its monetary policy meeting on June 18.
How do tariffs affect mortgage rates?
Since mortgage rates are highly sensitive to fiscal policy and supply chain shocks, a global trade war could impact their direction. For example, if the official inflation rate does increase due to tariff-induced price hikes, the Fed could further postpone rate cuts, and mortgage rates could increase.
"Even though many of the tariffs are in place, some of the big ones have yet to take effect," said Bovino. The average household in the US is expected to lose about $3,000 in income from tariffs, with lower-income households getting hit even harder, according to Bovino.
People who are nervous about finances will also be more reluctant to take on new mortgage debt.
How does war influence mortgage rates?
In the coming weeks, housing market experts will closely monitor the potential for another military escalation in the Middle East and its impact on oil prices and recession risks. War often comes with increased uncertainty and volatility in financial markets. Yet with the Israel-US-Iran ceasefire holding steady for now, rates haven't undergone major fluctuations.
Logan Mohtashami, lead analyst of Housing Wire, said that traders mostly saw the bombing of Iran's nuclear facilities as a short-term event, muting its impact on the bond market.
A short confrontation based on air strikes is not the same as a sustained battle with boots on the ground, said Matt Graham of Mortgage News Daily.
According to Graham, while significant geopolitical conflicts have traditionally led to lower interest rates as investors flock to safer bonds, other elements can lessen or even reverse this effect. Most importantly, if the conflict causes inflation, it can cancel out any positive impact on rates.
Will the housing market become affordable?
Major affordability challenges resulted in another inactive spring homebuying season. Even as the long-standing housing shortage eases in several local markets and gives some buyers improved negotiating power, the rest remain locked out by steep home prices.
"Prices are still incredibly high," Bovino said. "Add to that the borrowing costs of a mortgage, and it's prohibitively expensive for most people to get into the housing market." Plus, with recession risks still on the horizon, people who are nervous about finances will be more reluctant to take on mortgage loan debt.
Prospective buyers waiting for mortgage rates to drop may soon have to adjust to the "higher for longer" rate environment, with mortgage rates fluctuating between 5% and 7% over the longer term.
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Last year, nearly half of all homebuyers secured a mortgage rate below 5%, according to Zillow.
Here are some proven strategies that can help you save up to 1.5% on your mortgage rate.
💰 Build your credit score. Your credit score will help determine whether you qualify for a mortgage and at what interest rate. A credit score of 740 or higher will help you qualify for a lower rate.
💰 Save for a bigger down payment. A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
