Mortgage rates move closer to 6% — and the forecast is getting sunnier

While the impacts on mortgage origination volumes and home sales have yet to be keenly felt, declining mortgage rates appear to be putting the housing market in a better position for the final three months of 2025.

On Tuesday, HousingWire’s Mortgage Rates Center showed that rates for locked 30-year conforming loans averaged 6.33% — 12 basis points (bps) lower than a week ago. Rates for 30-year jumbo loans fell 3 bps to 6.23%, while 30-year loans through the Federal Housing Administration (FHA) dropped 6 bps to 6.16%.

Matt Vernon, the head of consumer lending at Bank of America, told HousingWire via email that recent rate declines have prompted “increased activity in the refinance market” through both rate-and-term and cash-out refi loans.

“Most people are focused on rate-and-term refinances to lower their monthly payments, while some are also looking to tap into their home equity,” Vernon said. “For example, HELOC rates dropped quickly after the Fed’s recent cut. Overall, there’s cautious optimism — people are paying attention, but bigger market challenges remain.”

In the purchase market, Vernon noted that starter homes are a bright spot as first-time homebuyers and borrowers with affordability hurdles have gravitated toward them.

Redfin recently reported that pending sales of starter homes — those priced among the bottom 35% of local markets — were up 10.2% annually in July to reach their highest level in nearly three years. This was likely driven by slower price appreciation as the 4.2% year-over-year growth for the starter-home segment was the lowest among the four price tiers tracked by Redfin.

“The good news is that as the Fed continues cutting rates, mortgage rates should come down even more,” Vernon said. “Bank of America expects another cut in December, plus 75 basis points of cuts through 2026. Buyers are noticing too — our latest Homebuyer Insights report shows that 52% say the market feels better than last year, and 75% expect prices and rates to go down.”

Similar observations were noted in a forecast released Tuesday by Fannie Mae economists. They call for mortgage rates to end 2025 and 2026 at 6.4% and 5.9%, respectively, down from their prior estimates of 6.5% and 6.1%.

Fannie Mae also downwardly revised its home-sales projections through next year while calling for annualized inflation through the Consumer Price Index (CPI) to moderate to 3.1% in the fourth quarter of 2025.

What will the Fed do next?

Housing market professionals will be closely watching the Federal Reserve in the coming months as the likelihood of further cuts in October and December are relatively high.

According to the CME Group’s FedWatch tool, 92% of interest rate traders are projecting a 25-bps cut at the end of October, which would bring the federal funds rate to a range of 3.75% to 4%. It hasn’t been that low since November 2022, when the central bank was squarely in the middle of a series of rate hikes to combat 40-year-high inflation.

Three-quarters of interest rate traders say the fed funds rate will fall another 25 bps in December. But there are hurdles to navigate before this could become reality, Vernon noted.

“The biggest challenges to more Fed rate cuts or lower mortgage rates are inflation and the overall health of the economy,” he said. “Even if the Fed lowers its key rate, rising prices or unexpected economic changes could push mortgage rates back up.

“Mortgage rates track the bond market, specifically the 10-year Treasury, which doesn’t always move in sync with Fed decisions. Lower rates can make buying or refinancing easier, but high home prices are still a challenge for many buyers. That’s why it’s often smarter to focus on what you can afford today rather than waiting for rates to drop further.”

Fed governors Stephen Miran and Michelle Bowman spoke publicly this week about the state of the U.S. economy and offered their views on the path for monetary policy.

On Monday in New York City, Miran — who was the only Fed official to support a 50-bps rate cut last week — said that the “appropriate” policy rate is roughly 2 percentage points lower than where it currently stands.

“The Federal Reserve has been entrusted with the important goal of promoting price stability for the good of all American households and businesses, and I am committed to bringing inflation sustainably back to 2 percent. However, leaving policy restrictive by such a large degree brings significant risks for the Fed’s employment mandate.”

On Tuesday in Asheville, North Carolina, Bowman reiterated her stance that the Fed should’ve started rate cuts sooner, adding that “as trade policy has become more certain, tariffs will have only a small and short-lived effect on inflation going forward.”