Mortgage rates could move higher despite a Fed cut

While the Federal Reserve is expected to deliver another interest rate cut on Wednesday, mortgage rates aren’t likely to move much lower. They could, in fact, move higher depending on the policy signals given by Fed Chair Jerome Powell.

Mortgage News Daily reported Monday that rates were near three-month high points, with 30-year fixed rates averaging 6.36%, up 5 basis points from a week earlier.

At HousingWire’s Mortgage Rates Center (MRC) on Tuesday, rates for 30-year conforming loans averaged 6.33%, down 3 bps from one week ago. Rates for 30-year loans through the Federal Housing Administration were at 6.12%, down 1 bps during the week, while rates for 30-year jumbo loans rose 8 bps to 6.27%. The MRC analyzes locked loans across all credit profiles.

As HousingWire Lead Analyst Logan Mohtashami pointed out earlier this week, spreads between 10-year Treasury rates and 30-year mortgage rates have come down significantly over the past two years.

Vishal Garg, CEO of digital lender Better.com, said in an email interview with HousingWire that it’s a “big deal” for spreads to compress as the Fed has yet to reach a neutral policy rate despite a string of small cuts that stretch back more than a year.

“We’ve already started seeing a pickup in consumer engagement and lock volume at Better.com as rates have moved lower,” Garg said. “With a Fed that’s back in the MBS market, we expect pricing to get more competitive, especially for conforming loans.”

Fed policy moves

Garg’s comments referred to the Fed’s decision in late October to begin winding down its quantitative tightening (QT) efforts this month.

The central bank began rolling over its principal payments from its Treasury securities holdings that matured in October and November beyond a monthly cap of $5 billion. And it’s now reinvesting principal payments from its portfolio of agency debt and agency mortgage-backed securities (MBS) received during the same two months that exceed $35 billion per month.

“The Fed’s decision to end QT and begin reinvesting MBS proceeds is a meaningful tailwind for the mortgage market,” Garg said. “Even though spreads have come down from their peak, they’re still well above historical norms, hovering around 200 to 225 basis points versus a long-term average closer to 150. The Fed’s re-entry as a buyer can help close that gap.”

While the current Fed leadership under Powell has taken a conservative stance on the speed and frequency of rate cuts, that could change later in 2026 once a new Fed chair is installed.

President Donald Trump has made no secret of his desire for much lower interest rates. And a decline of 200 bps in the federal funds rate, for example, could be “transformative for the mortgage market,” according to Garg.

“There are approximately 20% of Americans with loans above 6%,” he said. “A drop like that would make refinancing a no-brainer, saving families $300 to $500 a month in many cases.

“For new buyers, it would dramatically improve affordability and unlock pent-up demand from the million who’ve been priced out of the market during this high-rate cycle.”

Interest rate traders remain highly confident that the Fed will issue a third straight cut to benchmark rates on Wednesday. The CME Group’s FedWatch tool on Tuesday showed 90% odds of 25-bps cut. But looking ahead to January, 70% say the cuts will be put on hold.

“The Fed still lacks official October and November employment data, but September’s jobless rate of 4.44 percent already sits above the Committee’s central range for ‘maximum employment,’ underscoring a softening labor market,” First American senior economist Sam Williamson said.

“Should the Committee cut as expected, the decision is likely to garner multiple

dissents — possibly in both directions — as an increasingly divided Fed weighs upside inflation risks against rising employment concerns.”

Housing market impacts

This week’s Housing Market Tracker shows that pending home sales continue to run higher compared to this time last year, while demand for purchase mortgages has peaked at its highest rate in three years.

Home-price appreciation has slowed too, which has impacted monthly mortgage payments. October data from the Mortgage Bankers Association showed that homebuyer affordability improved for a fifth straight month as the median monthly payment of $2,039 among purchase applicants was $88 lower than a year ago.

“Housing affordability is finally moving in the right direction, with several consecutive months of year-over-year improvement as home-price gains cool, incomes rise faster than prices, and rates ease at the margins,” Williamson said.

“Taken together, these forces point to a measured, but persistent, recovery in buying power through next year — even if mortgage rates don’t decline meaningfully.”

Garg said that stable home-price growth is helping more consumers to reengage with the housing market. Better is seeing benefits for first-time buyers and move-up buyers in markets like Texas, Florida, Georgia and the Carolinas — areas where home prices, for-sale inventory and job growth trends are favorable.

Refinance opportunities are also likely to appear more frequently as rates gradually move lower, and Garg said that his company is prepared to recapture many of its current clients.

“Recapture is everything in a refi market, and the window to win that borrower is shockingly short,” he said. “Once rates drop into the money, most borrowers who refinance will do it within two to four weeks of realizing they can save.

“If you’re not the first lender to show them their personalized savings and deliver the speed needed to help them begin saving before their next mortgage payment, you’ve already lost.”