Why mortgage rates remain high despite Fed rate cuts

The new year is upon us, and with it comes a tricky environment for mortgage borrowers to navigate. The Fed ends the year on a positive note, with mortgage rates down a full percentage point Three consecutive interest rate cuts. The moves lowered the federal funds rate, the rate banks charge to lend to each other, from 5.25% to 5.50% in September to 4.25% to 4.50% in December.

Inflation is also on a downward trend in 2024, but the decline is not significant. A year ago, annual inflation was 3.1%, fell during the summer, picked up in November, and ultimately stabilized at 2.7%, according to the latest consumer price index. mixed in one Employment report stronger than expected In December, you can learn about the Fed's decision to cut interest rates and the potential for lower mortgage rates.

When the Fed cuts interest rates, it typically causes mortgage rates to fall as borrowing costs fall overall. But unfortunately, mortgage interest rate The index has instead climbed since the Fed cut interest rates. This is why this happens.

Compare today's highest mortgage rates online today.

Why mortgage rates remain high despite Fed rate cuts

As of January 14, 2025, the average interest rate on a 30-year fixed-rate mortgage was 7.01%, according to Freddie Mac. This is nearly 1% higher than the average rate on September 19, 2024, of 6.09%. Available immediately upon publication by the Fed First interest rate cut in more than four years. But as experts point out, the Fed's decision isn't the only indicator of where mortgage rates are headed.

“If only it were that simple,” said Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage. “The best benchmark for mortgage rates is the 10-year Treasury note. Unfortunately, Yields are the highest in more than a year, which generally means we will see interest rates continue to rise until this situation stabilizes.”

DeFlorio also pointed to inflation concerns stemming from tariffs, global turmoil and data showing inflation has yet to be brought under control as factors contributing to market jitters.

“Hopefully, things will stabilize this year and we'll see a meaningful and lasting decline in interest rates,” DeFlorio said.

Robert Johnson, CEO of Economic Index Associates and a professor at Creighton University's Heide School of Business, agrees that other factors are at play.

“While the Fed's monetary policy is a factor that affects interest rates, it is certainly not the only factor. Fiscal policy, expected trade policy, and the strength of the U.S. economy also factor into interest rates. It appears that in the current environment, these other factors are offsetting dovish monetary policy,” Johnson said.

Find the mortgage options that are right for you here.

How the bond market affects mortgage rates

As mentioned earlier, mortgage rates have not fallen as interest rates have fallen. Fed cuts interest rates Because they depend on factors other than the agency's base rate, such as the economy and 10-Year Treasury Bond Yield. For example, when 10-year Treasury bond rates rise, mortgage rates tend to follow, and vice versa.

Although Treasury and mortgage rates tend to move in similar patterns, they are not the same. Mortgages carry higher risks, which is why their interest rates are historically higher by 1.7% to 2.25%. For example, on January 9, the average mortgage rate was 6.93%, which was 2.25% higher than the 10-year Treasury note rate of 4.68%.

These above-average bond rates are One reason why mortgage rates remain high. They raise borrowing costs for lenders by raising the returns investors can expect on mortgage-backed securities, which lenders then pass on to borrowers.

“Higher yields mean higher interest rates. When we see these jumps in the market, banks are always quick to raise rates and, of course, much slower to lower them,” DeFlorio said.

How soon will mortgage rates start falling?

it may take a while Mortgage rates plummetat least until the Fed says they believe inflation is well under control. To get a better handle on where interest rates are headed, keep an eye on inflation, employment and consumer confidence reports to gauge economic trends. For now, patience may be necessary.

Mason Whitehead, branch manager at Churchill Mortgage, said: “I've been saying for some time that we wouldn't see a significant drop in rates until late 2025, but even that might be premature.”

Whitehead also noted that mortgage rates are likely to remain in the 6% and 7% range for some time, so the wait is unlikely to result in a significant drop in rates in the near future.

Whitehead noted that interest rates remain about where they are historically normal.

“The problem is that there are a lot of consumers now who think our 2020 and 2021 rates are 'normal' and want to 'wait for rates to come down.' Historically, a rate of 6 is actually very good,” Whitehead said.

bottom line

You may benefit even if mortgage rates don't drop as fast as you'd hoped Buy a house now Rather than waiting for interest rates to fall. If your finances are in good shape and you can easily afford the mortgage and other home-buying costs, buying now can help you lock in housing costs as rents continue to rise. By buying now before the sale goes on, you may also face less competition from buyers and a lower likelihood of a bidding war. Real estate market heats up.

As the saying goes, “You pay for a date, you pay for a house.” If interest rates drop in the future, you can refinance to take advantage of the lower rates. If you decide to buy now, compare offers from multiple lenders to get the most competitive rate.