Talk about anticlimactic, right? Millions of renters and homeowners have been waiting all year for the Federal Reserve to lower interest rates. Everybody just kind of assumed that lower government borrowing rates would have a direct impact on mortgage rates.
But one week on from the Fed’s hotly anticipated rate cut, and mortgages haven’t moved a muscle. If anything, some rates actually ticked up right after the Fed’s announcement.
So, what gives?
Unfortunately, there are a couple strong market forces at work here — and if you’re looking to snap up a rock-bottom mortgage deal in 2025, you’re probably going to end the year disappointed. It all comes down to how mortgage rates are set and what's happening in the wider economy.
Why Are Mortgage Rates Going Up?
Before we jump into why mortgage rates are on the rise, there’s something you need to know: Mortgage rates don’t follow Fed rate changes as closely as everybody thinks.
The federal funds rate is an overnight borrowing rate. It’s all about short-term debt, and a mortgage is anything but short term. Instead, the interest rate on your mortgage is tied to long-term bond-yields like the 10-Year Treasury Note ($TNX).
When a bank gives you a mortgage, it doesn’t keep your loan on its books. Instead, most banks sell mortgages on the secondary market bundled into mortgage-backed securities. From there, investors buy up loans in the same way they trade government or corporate bonds.
And because mortgages are traded in the same way as other debts, rates need to be competitive with other long-term bond yields. That’s why mortgage rates tend to float around in line with Treasury rates.
Unfortunately, Treasury rates are going up right now, and the biggest culprit is inflation.
The Fed aims to keep U.S. inflation sitting at or around 2% at all times. But the Consumer Price Index (CPI) has been rising steadily since April 2025, and we’re starting to stray off course. Inflation hit 2.9% in August, and market watchers aren’t forecasting any better for September.
As a result, lenders will demand higher yields in exchange for taking on the risk that bonds will be worth less in the future. Pair that with the fact that the Treasury has been issuing record debts to fill federal funding gaps, and there’s a clear oversupply. That pushed bond prices down and yields even higher.
In terms of supply imbalance, there are also overseas players here. Global demand for U.S. bonds is decreasing. Countries like China and Japan are steadily scaling back their exposure to the dollar and selling off their Treasuries. Again, this waning demand has an impact on bond yields.
Unfortunately, mortgage rates will only continue to follow. The Fed can cut borrowing rates as much as it likes. But if investors aren’t convinced inflation and government borrowing are under control, they’re going to continue pricing mortgages based on high Treasury yields that show no signs of going down.
What Should Happen to Mortgage Rates After a Fed Cut?
The reason this has thrown everybody is that Fed rate cuts should theoretically bring mortgage rates down.
When the Fed makes borrowing cheaper, this stimulates the economy and reduces financing costs. And when borrowing costs go down, bond yields are supposed to decline along with them.
There is usually a lag effect, though. Bond markets don’t move in step with the federal funds rate. They take a while to digest rate cuts, changes to inflation, and debt supply. As a result, Treasury yields can often take weeks to go down after the federal funds rate is cut.
Mortgages can take even longer. Adjustable-rate mortgages tend to drop quicker because these loan rates are tied to short-term benchmarks like the Secured Overnight Financing Rate (SOFR). But if you’re waiting for fixed-rate mortgage rates to decline, it could be months before you see a significant impact.
Again, this is all theoretical. Because inflation is going up and demand for Treasuries has dropped, mortgages haven't moved the way they're supposed to. And to be honest, they probably won't move (yet).
When Will Mortgage Rates Come Down? And What Rates Do Experts Expect for 2026?
Here’s the bad news: Mortgage rates aren’t coming down for a little while longer.
The near-term outlook is that the Fed's initial rate cut won’t be enough to cut inflation or ease supply imbalances in terms of government debt. Meanwhile, there’s a good chance lenders will sit on any potential rate cuts for the next couple of months in response to seasonal demand.
Right now, the average 30-year deal is sitting at 6.3%. And although rates have been slowly declining as we move into autumn, nobody’s going to lock in at under 6% before the new year.
In fact, analysts over at Fannie Mae reckon we won’t slip under the 6% mark until the end of 2026. That’s on-par with what the National Association of Realtors has been saying. Their chief economist is forecasting mortgage rates to float around 6.4% over the next few months before dropping to 6.1% at the start of next year.
What's the bottom line for homebuyers? Don’t put your life on hold trying to lock in the perfect rate.
The market isn’t going to get any more affordable in the near term. So if you want to get on the housing ladder and you’ve found a home that’s within your budget, locking in at today’s rates might be your best bet. Rates are going to keep fluctuating across 2025, and any reductions we see over the next 12 months will be pretty insignificant.
Just remember: If you are planning to buy soon, make sure you shop aggressively. There are loads of challenger banks offering slightly lower interest rates that can save you thousands over the lifetime of your loan. And if rates do drop faster than expected, the silver lining is that decent refinancing opportunities should start to open up in the months to come.
