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After four straight months of increases, the inflation rate fell slightly in February, dropping to 2.8% from 3.0% the month prior. But despite those recent upticks, today’s inflation rate is a big improvement compared to 2022, when inflation surpassed 9%. Still, it’s hardly a surprise that inflation has been a key topic of conversation over the past several years. And while Americans are keeping an eye on inflation for many reasons, one particular reason is the effect it has on mortgage rates.
Mortgage rates have remained elevated over the past couple of years, reaching their peak in late 2023, largely as a result of the Federal Reserve’s response to inflation. However, since inflation has been trending downward overall over the past few years, and just fell month-over-month in February, many current and prospective homeowners now wonder when inflation will be low enough for mortgage rates to drop again.
If you’ve been waiting for inflation to drop and push down mortgage rates, here’s what experts have to say on the topic.
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When will inflation be low enough for mortgage rates to drop?
While inflation doesn’t directly cause mortgage rates to rise, there is a correlation between the two. You’ll often see that as inflation rises, mortgage rates tend to follow suit.
One reason for this trend is Federal Reserve policy. The Fed responds to high inflation by raising the federal funds rate, which trickles down to other rates — including mortgage rates. On the other hand, when inflation and economic growth slows, the Fed lowers rates, which can bring mortgage rates down with it.
“Inflation is a key factor when the Fed is deciding their course of action for the fed funds rate,” says Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage. “While the Fed funds rate does not immediately impact mortgage rates, the overall sentiment of the market as it digests economic data has the ability to help swing rates in either direction.
DeFlorio notes that factors other than the federal funds affect mortgage rates. However, a general rule is that as inflation falls (meaning as economic growth slows), interest rates fall.
“The most direct correlation for mortgage rates is with the 10-year treasury bond yields — and as a rule of thumb, bad news for the economy is good news for mortgage rates. So, while a recession could spell very difficult times for many people, it would also push rates down,” DeFlorio says.
The original expectation among experts was that inflation would continue to fall throughout 2025, bringing mortgage rates down with it. However, the rise in inflation in late 2024 and early 2025, and the increased economic uncertainty that started early this year, have raised some questions.
At the Fed’s most recent meeting, it declined to lower the federal funds rate. Meanwhile, many financial experts believe the Fed will hold rates steady for at least the early part of 2025, possibly considering rate cuts later in the year depending on how inflation plays out. If the Fed cuts interest rates, it’s likely mortgage rates would fall as well. The Fed generally aims for an inflation rate of 2%. If we get to that point, a rate cut would be more likely.
“While the target is 2% for the inflation rate, it is important to keep in mind that the Fed will also be looking for consistency of the data over a longer period of time in order to feel confident that they have been successful in their mission of maintaining economic stability,” says DeFlorio.
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What experts say could happen with mortgage rates
It’s impossible to know for certain what will happen to mortgage rates in 2025. On the one hand, if inflation continues to fall, as it was expected to in 2025, and the Fed lowers the federal funds rate, it’s likely we’ll see a rate cut. On the other hand, if inflation rises again, we could see rates stagnate — or, in the worst-case scenario, increase again.
The general belief among industry experts is that mortgage rates will fall slightly later in 2025, but that they won’t fall as much as initially predicted. That means mortgage rates are still likely to remain well above pre-pandemic levels for now.
“Rates will likely trend down. We have had an incredibly resilient economy and job market, yet the current instability is creating more uncertainty and talks of a recession,” Nicole Rueth, the founder of The Rueth Team Mortgage at Movement Mortgage. “If that is the case, we could see mortgage rates as low as 6% by the 3rd quarter. Of course, there is much that still depends on economic data and Fed moves.”
Of course, inflation and the federal funds rate aren’t the only factors that impact mortgage rates.
For example, 10-year Treasury otes are closely correlated with mortgage rates, given their similarly long time horizons. A variety of factors can affect 10-year Treasury rates, including both monetary and fiscal policy, economic growth and inflation. Any changes in mortgage rates that occur throughout 2025 will likely be the result of a combination of these factors.
The benefits of locking in a mortgage rate now
High mortgage rates have left plenty of prospective homebuyers sitting on the sidelines, hoping loans will become more affordable. But the general consensus among the experts we talked to is that it isn’t the right strategy for most people.
“Inventory is the biggest challenge for homebuyers across the U.S. Inventory levels are extremely low, and buyer demand is still high,” says Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation. “As rates slowly come down, more buyers will be in the market, which will increase competition.”
According to Schachter, it’s impossible to time the housing market. In all likelihood, you’ll be entering the market at the same time as all the other buyers who have been waiting on the sidelines.
“Home values are also increasing,” says Schachter. “If you are looking at that $500,000 home but holding off due to interest rates, when rates come down, that same home more than likely will be higher. The wait in buying to get a lower rate may cancel out the increased value of that home in your mortgage payment.”
Schachter recommends that if the perfect house comes along and you can afford the monthly payment, buy it — and if the opportunity arises, you can refinance at a lower rate later on. Buying now, before rates decline, can help you get ahead of the competition, giving you the best shot and buying the right house at the right price.
The bottom line
If you’ve been in the market for a home, then you’ve likely been keeping a close eye on inflation and mortgage rates, hoping to see them come down. While there’s some uncertainty in the rate market today, experts still believe mortgage rates will fall slightly in 2025, though maybe not as much as they previously thought.
However, that doesn’t mean you should wait until rates fall to buy a house. If the perfect house comes on the market and you can afford it, it may be worth taking the leap at a higher mortgage rate and refinancing later.
