Since the second half of 2022, mortgage rates have surged to 6% to 7%, and by fall 2023 they had risen nearly to above 8%, marking the highest 30-year mortgage rate in more than two decades.
Rising interest rates, combined with rising home prices, are causing mortgage payments to skyrocket. According to the National Mortgage Bankers Association, the average monthly mortgage payment for a new home purchase is now $2,219, 2.5% higher than a year ago. This increase is discouraging many homebuyers from purchasing and deterring existing homeowners from selling (about 9 in 10 people currently have interest rates below 6% and may not want to give up those low rates).
It raises the question: How long will these high interest rates continue? And when can consumers expect mortgage rates to fall and make their monthly payments a little easier? Here's what we know:
Read more: What first-time home buyers need to know in 2024
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When will mortgage rates fall?
To predict when mortgage rates will fall, it's important to understand why rates increased in the first place.
Most of it has to do with inflation. As inflation has risen, the Federal Reserve has raised interest rates to rein in spending. The central bank has raised the benchmark federal funds rate — the rate banks borrow from each other — 11 times between 2022 and 2023, from nearly 0% to the current range of 5.25% to 5.50%. Mortgage rates aren't directly tied to the Fed rate, but when Fed rates rise, mortgage rates tend to rise too.
The Fed's measures have been largely successful in lowering inflation, but not enough. Inflation stood at 3.3% year-on-year in May 2024, well above the central bank's 2% target. As a result, the Fed is keeping interest rates high in hopes of lowering inflation further.
And that long period of high interest rates has kept current mortgage rates high, and experts say they're likely to remain so until the Fed decides inflation is under control and starts cutting its benchmark interest rate.
“For rates to improve, we would need to see lower inflation, slower new job creation and rising unemployment claims,” Evan Ruchaco, a mortgage specialist at Churchill Mortgage in Portland, Ore., said in an email. “These are all signs of an economic slowdown that would prompt the Fed to take action to lower the federal funds rate, which would have a trickle-down effect of lowering mortgage rates.”
Ruchaco said he expects to see this trend toward the end of the year, but it's not set in stone yet. Currently, the CME FedWatch tool, which uses investment activity to predict future Fed actions, is pointing to the possibility of a small rate cut at the September meeting, but it may be just one cut this year.
“Inflation needs to moderate for interest rates to fall,” Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate, said in an email. “Based on current economic forecasts, it looks like interest rates could fall, but all of the forecasts for the past two years have been wrong.”
Mortgage interest rate forecast
There is no crystal ball that can predict when interest rates will fall, and interest rate forecasts depend largely on who you ask.
Here are mortgage interest rate forecasts from two major industry players for the next few years:
As you can see, both firms predict that interest rates will fall over the next year or two, but that the decline will be very gradual. Experts also do not foresee a dramatic decline in interest rates to 3% or 4%, as we have seen during the height of the COVID-19 pandemic.
“The only time we'd see rates fall significantly would be if the U.S. were to fall into a deep recession,” Neil Christiansen, a mortgage expert at Churchill Mortgage in Denver, said in an email. “If the Fed determines the economy is slowing and stagnating, they could cut rates significantly to help stimulate the economy, but as things stand, I don't see any big cuts in interest rates anytime soon.”
Should I wait until mortgage rates drop to buy a home?
Interest rates will likely fall over the next few years, but not by much. So is it worth waiting for them to drop? The answer is different for everyone, but let's do the math.
“For people waiting for interest rates to fall, I often show them what their current payment would be and what it would be if it went down by one percentage point,” Beeston says. “They are often surprised at how small the difference is. The impact of a fall in interest rates on your payment is much more dramatic on a $1 million purchase than on a $100,000 purchase.”
Below are examples of how lower interest rates would affect principal and interest payments on mortgages of $250,000, $500,000, and $1 million.
Additionally, you should also consider the state of the housing market. While lower mortgage rates may reduce your monthly payment slightly, lower interest rates can also mean more competition for properties, which can result in higher home prices and bidding wars (which also drive up prices).
Ruchaco explained: “House prices are unlikely to fall significantly and while interest rates may fall, this will encourage more people to enter the housing market, increasing demand for housing and encouraging home prices to rise again.”
That's why most experts recommend buying a home when the timing and amount suits you. If you need to get out of the rent game and you've got the interest rate and payment terms you can afford, pull the trigger, experts say. You can plan to refinance later when interest rates drop.
“From where I stand, the cost of waiting will continue to hurt buyers, even in the current interest rate environment,” Christiansen said. “Home prices continue to rise 5 to 6 percent annually, and the longer buyers wait, the more they miss out on the opportunity to increase their net worth due to higher prices and lower mortgage payments.”
Buying early gives you a chance to start building home equity.
Learn more: Is now a good time to buy a home?
How to lower your mortgage interest rate
The average interest rate on a 30-year fixed mortgage is currently around 7%, but the exact interest rate on your mortgage will depend on many factors, including your loan amount, your credit score, and your mortgage lender.
To ensure you get the best mortgage rate possible, compare mortgage lenders. Get loan quotes from each lender to see what the interest rates and fees will be. According to Freddie Mac, comparison shopping can save you between $600 and $1,200 a year.
You can also work on improving your credit score, as borrowers with higher credit scores tend to receive lower interest rates.
Finally, consider lowering your interest rate. When you lower your interest rate, you lower your interest rate either permanently or temporarily in exchange for paying an upfront fee on the day of settlement. If you're interested in this strategy, talk to your mortgage loan officer.
Read more: 5 strategies to get the lowest mortgage interest rate
Frequently asked questions about mortgage interest rates predictions
Will mortgage rates fall in 2024?
Mortgage rates may fall in 2024, but that's not a certainty. The Mortgage Bankers Association predicts they'll be at 6.6% by the end of the year, while Fannie Mae projects them to be at 6.7% by the end of 2024.
Will mortgage rates fall to 3% again?
The only times mortgage rates have been below 3% are in extreme circumstances, notably during the peak of the COVID-19 pandemic. A significant deterioration in economic conditions would be required for rates to fall that low again.
What will mortgage interest rates be in five years' time?
While there is no official source that forecasts what interest rates will be five years from now, the Mortgage Bankers Association projects that rates on 30-year mortgages will fall to 6% by the end of 2025. Fannie Mae predicts 6.3%.
Are mortgage rates falling?
Mortgage rates haven't fallen, at least not by much: The average rate on a 30-year loan has remained stable in the 6% to 7% range for most of the past two years.
This article was edited by Laura Grace Tarpley.