The Federal Reserve Board meets yet again on Nov. 6-7, 2024, and with that meeting, another cut to the federal funds rate is expected. Although mortgage rates are not directly impacted by the federal funds rate, they do tend to reflect the movement of this metric. With the federal funds rate on the decline, it’s reasonable to expect that mortgage rates will drop going into 2025 and may continue to drop throughout the year.
But what does this mean for you? And most importantly, how will 2025’s updated 30-year mortgage rates affect your wallet? There are a couple ways these changes can make a big dent.
If you already bought your home
If you bought your home already, it might seem as if there’s nothing a change in rates will do for you, but that really depends on when you bought your home. If you bought prior to spring 2022, you probably don’t need or want to make a move, since your interest rate is likely in the 5% range, or perhaps even below that.
However, if you bought more recently, especially after fall 2022, your rate is almost certainly in the 6% or higher range. Summer 2023 buyers are in the worst situation of all, likely in the 7% or higher range on their mortgage. If you’re in any of these groups, the lower interest rates that have already started to appear and that will be more prevalent in 2025 could save you a ton of money.
You’ll have to refinance your mortgage to take advantage of lower rates, but we’ve already made a list of refinance lenders for you to check out here. A refinance, especially early in your mortgage, can not only save you money every month, but also on the amount of interest you pay in the long term.
If you plan to buy a home in 2025
Planning to jump into the market in 2025 as a buyer? First-time buyers, especially, are going to continue to be in a hard place. Although it seems as if the median sales price of homes has kind of topped out, there’s still a huge issue of shortages of both the types of real estate people actually want to buy, and of listings overall, with Redfin reporting just three months of housing inventory in September 2024. (It usually takes closer to a four- to six-month supply to better balance the housing market.)
As such, you’ll really have to hustle to find a house that works well for you. The good news is that if home values remain more or less steady, you’re going to save a bunch of money every month over if you bought in 2024. How much, you ask?
Well, if you’re looking at a home for $425,000 and have a 5% down payment, your interest rate in May 2024, for example, might have been around 7.25%. The average rate for a 30-year fixed-rate mortgage is already down to 6.5% right now, but experts expect further cuts to the federal funds rate, which should help push that down even more. Let’s say it gets to 5.5% in 2025. The difference in the principal and interest portion of your monthly payment vs. a year earlier would be about $462 per month, or $5,542 per year.
| May 2024 | May 2025 | |
|---|---|---|
| Principal borrowed | $403,750 | $403,750 |
| Interest rate | 7.25% | 5.5% |
| Principal and interest payment | $2,754.29 | $2,292.45 |
Data source: Calculations by author.
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2025’s mortgage rates promise more money in your pocket
Rates have been more or less historically average for the last couple of years, but with the Federal Reserve poised to make at least one more cut to the federal funds rate in 2024 and more in 2025, it’s very likely that 2025 will have much better mortgage rates than we’ve seen in a while.
This means that if you’re ready to buy, you should definitely get on it in 2025, and if you’ve already bought, it’s time to do the math and see if you will make out by refinancing your current mortgage loan into a lower priced mortgage. Depending on how long you plan to stay in your home, you may see substantial savings.
You can get ready now for your future mortgage by:
- Reducing debt to improve your debt-to-income ratio
- Continuing to save for your down payment
- Looking into down payment assistance for first-time home buyers
- Making your payments on time to maintain your credit score
- Not applying for new credit lines to minimize hard inquiries on your credit report
Although none of us can see the future and we can only rely on forecasts for where interest rates may go, a solid shake of the ol’ Magic 8-Ball says that “signs point to yes” when it comes to a serious rate reduction in 2025 from previous highs.
