Current State of Mortgage Rates
Mortgage rates are currently holding near a two-month low, with average 30-year fixed rates having fallen just below 6.7%, according to Bankrate data. This is a positive sign in today’s unaffordable housing market. However, it’s unclear how much staying power the recent decline will have.
Factors Affecting Mortgage Rates
Thursday’s Bureau of Labor Statistics job report showed slightly lower unemployment in June (4.1% compared to 4.2% in May) than economists expected. Because stronger economic data typically is bad news for mortgage rates, prospective buyers could expect slightly higher rates in the coming days. Overall, experts say rates are likely to stay above 6.5% throughout 2025.
Relationship Between Mortgage Rates and the Economy
Mortgage interest rates are closely tied to the 10-year Treasury. Bond market investors drive yields (rates) higher or lower based on their expectations for inflation, unemployment, Fed policy decisions, and government debt. Lower unemployment makes it less likely that the central bank will reduce borrowing costs this summer. But despite Thursday’s stronger-than-expected reading, other recent data point to a clear cooling off in the labor market: Hiring has sharply slowed and jobless claims are on the rise.
Fed Rate Cuts and Mortgage Rates
The central bank is responsible for ensuring full employment and controlling inflation, mainly by setting short-term interest rates for banks. Though the Fed’s policy changes have a ripple effect on all borrowing rates, the central bank doesn’t directly set the rates on home loans. The market currently projects an interest rate cut in the fall, though two Fed officials floated the possibility of a rate cut this month.
Impact of Tariffs on Mortgage Rates
Since mortgage rates are highly sensitive to fiscal policy and supply chain shocks, a global trade war could impact their direction. For example, if the official inflation rate does increase due to tariff-induced price hikes, the Fed could further postpone rate cuts, and mortgage rates could increase. The average household in the US is expected to lose about $3,000 in income from tariffs, with lower-income households getting hit even harder.
War and Mortgage Rates
War often increases uncertainty and volatility in financial markets. Yet, with the Israel-US-Iran ceasefire holding steady for now, rates haven’t undergone major fluctuations. A short confrontation based on air strikes is not the same as a sustained battle with boots on the ground. According to experts, while significant geopolitical conflicts have traditionally led to lower interest rates as investors flock to safer bonds, other elements can lessen or even reverse this effect.
Housing Market Affordability
Major affordability challenges resulted in another inactive spring homebuying season. Even as the long-standing housing shortage eases in several local markets and gives some buyers improved negotiating power, the rest remain locked out by steep home prices. Prospective buyers waiting for mortgage rates to drop may soon have to adjust to the "higher for longer" rate environment, with mortgage rates fluctuating between 5% and 7% over the longer term.
Strategies for Lower Mortgage Rates
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Here are some proven strategies that can help you save up to 1.5% on your mortgage rate:
- Build your credit score: Your credit score will help determine whether you qualify for a mortgage and at what interest rate.
- Save for a bigger down payment: A larger down payment allows you to take out a smaller mortgage and get a lower interest rate from your lender.
- Shop for mortgage lenders: Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate.
- Consider mortgage points: You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount.
Conclusion
In conclusion, the current state of mortgage rates is uncertain, and various factors such as the economy, tariffs, and war can impact their direction. While there are strategies to make buying a home more affordable, prospective buyers must be prepared for the "higher for longer" rate environment. By understanding the factors that affect mortgage rates and taking steps to improve their credit score, save for a down payment, and shop for lenders, buyers can make informed decisions and potentially save on their mortgage rate.
