Why Mortgage Rates Aren’t Dropping

by Stephanie Hrutkay

The Fed lowered the Fed Funds Rate last fall but mortgage rates have increased. Why?

The Federal Reserve began lowering the Fed Funds Rate this past September with a ½ point decrease, followed by additional ¼ point reductions in November and December. Consumers had eagerly awaited these reductions in the hope that rates on consumer loans, such as mortgages, would follow.

Unfortunately, the opposite has been the case.

According to Freddie Mac’s weekly mortgage rate survey, the average rate on 30-year fixed-rate loans closed during the week of the September Fed rate cut was 6.08%. The survey shows the average rate increasing in the following months with that number currently sitting at 7.04%. So, with a total decrease in the Fed Funds rate of 1.0%, mortgage interest rates have actually increased 1.0%. Why?

Mortgage rates generally track the direction of the 10-year Treasury Yield. The 10-year yield and the yields of other long-term treasuries and bonds are driven largely by expectations of where short-term interest rates will be in the future, as opposed to where they are now.

The Federal Reserve lowered the extremely short-term interest rate, the Fed Funds Rate, but economic reports and even commentary from Federal Reserve governors continues to indicate concerns that instead of moving closer to the Fed’s 2% inflation target, we are actually moving away from it.

In addition to the actual economic numbers we are currently seeing, we have the prospect of tariffs being added to the mix, the result of which would very likely be inflationary. Fed commentary suggests they are less likely to continue lowering the Fed Funds Rate in the near term which has the impact of keeping long term yields, including mortgage rates at higher levels.

No one can tell consumers when mortgage rates will trend lower again, but waiting for lower rates before purchasing a home may not be the wisest financial move. The median price for a home in the DC Metro area rose approximately 6.2% in 2024 to $610,000. We continue to see low inventory and will likely see similar increases in home prices during 2025. As prices increase, so do loan amounts. Consumers should remember when rates decline, you can refinance a loan to a lower rate, but you can never “refinance” your purchase price to a lower price.

Let’s look at an example: a $610,000 purchase price now with 20% down at a rate of 7% results in a principal and interest payment of $3,247 on a loan of $488,000. Refinancing the balance a year later to a 6% rate reduces the P&I payment to $2,896.

But if a consumer waits that same year for rates to drop to 6%, the price of that same home will likely be $647,820, an increase of almost $40,000. With 20% down the loan would increase to $518,256 which results in a P&I payment of $3,107, or just $140 less than the previous year.

So while the purchaser saved $140/month in their P&I payment in the second example by waiting to purchase until rates dropped the next year, they could have saved $351/month by refinancing the loan if they had purchased the year before. Waiting for rates to decrease while home prices increase almost never makes sense.

If you’re in the market to purchase a home, we’d love to create a home-buying strategy that gets you a rate you can live with for a home you can afford today. Please reach out to me or my colleagues at Atlantic Coast Mortgage to get started.

Brian Bonnet - Atlantic Coast Mortgage

Brian Bonnet

SVP, Sr. Loan Officer, NMLS: 224811

Atlantic Coast Mortgage, NMLS: 643114

O: (703) 766-6702 | M: (703) 304-0188

Email Me

Notice: This is an advertisement and is not a commitment to lend. Contact a loan officer today to explore the financing options specific to each borrower.