Mortgage rates poised to plummet depending on latest Fed decision

The Federal Reserve will announce its latest rate decision and experts predict that it will be lowering the target rate by 25 basis points. After a highly-anticipated half-point rate cut in September, and a more modest quarter-point cut in November, this latest cut could potentially drop the target range to 4.25% to 4.50%, a full percentage point lower than it was in early fall.

How the Fed decision impacts mortgages

If the Fed cuts rates again it will be felt by investors, credit card holders, and borrowers, with prospective and current homeowners being no exception. When the federal funds rate drops, mortgage rates usually follow suit, but it's not always a clear pattern. For example, rates can sometimes drop in anticipation of the rate cut (as we saw in September), but then increase after the Fed rate announcement (which is what happened in November).

When determining how the Fed decision will impact your mortgage, it's important to also factor in the type of product you have. For example, adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are more closely correlated to the Fed's prime rate because they are variable-rate products. When the prime rate drops, lenders will typically react in kind (and vice versa).

Fixed-rate mortgages and home equity loans, on the other hand, are not as drastically impacted by the Fed rate movements.

What's next for the Fed

Some economists have tempered their outlook for Fed rate cuts in 2025, citing Donald Trump's election as president and his stated economic policy plans as a potential reason for fewer cuts. Fed Chair Jerome Powell has said the economy is stable enough for the central bank to be more cautious with future cuts. If inflation, which has been cooling, starts creeping up, economists expect additional cuts to come at a much slower pace.

Trump's economic plans, including tariffs on imported goods, tax cuts for individuals and corporations, and immigration restrictions have stoked concern that inflation will heat up under his administration.

In late November, J.P. Morgan said it expected the Fed to cut rates by a quarter-point in December and then slow the pace of cuts to one per quarter in 2025.

"Regardless of exactly what policies are introduced, a change in the party occupying the White House creates some new unknowns for the economy," Michael Feroli, chief U.S. economist for J.P. Morgan, writes in a November update to the firm's Fed rate outlook. "All of these factors could argue for a more gradual pace of interest rate cuts."

Current interest rate for a 30-year mortgage: 6.88%

Today's 30-year fixed-rate mortgage interest rate is 6.88%, unchanged from yesterday. 

Interest rates fluctuate daily and can directly impact your mortgage payment. For example, a $400,000 mortgage with a 30-year term at a 5.50% fixed interest rate would result in a $2,146 monthly payment. The same mortgage amount and term length with a 6.50% fixed interest rate bring the monthly payment up to $2,352, an additional $206 per month or $2,472 per year.

Current interest rate for a 20-year mortgage: 6.63%

Today’s 20-year fixed-rate mortgage interest rate is 6.63%, unchanged from yesterday. 

A $400,000 mortgage with a 20-year term at a 5.50% fixed interest rate would result in a $2,530 monthly payment. If the fixed interest rate jumps to 6.50% it raises the monthly payment to $2,715, an increase of $185 per month or $2,220 per year.

Current interest rate for a 15-year mortgage: 6.00%

Today's 15-year fixed-rate mortgage interest rate is 6.00%, 0.01 percentage points lower than yesterday.

On a $400,000 mortgage with a 15-year term at a 5.50% fixed interest rate, you can expect to pay $2,944 per month. If the interest rate increases to 6.50% the monthly payment increases to $3,117, a difference of $173 per month or $2,076 per year.

Current interest rate for a 10-year mortgage: 5.88%

Today's 10-year fixed-rate mortgage rate is 5.88%, unchanged from yesterday.

On a $400,000 mortgage with a 10-year term and 5.50% fixed interest rate, the monthly payment amounts to $3,802. With the same mortgage amount and term length and a 6.50% interest rate, the monthly payment rises to $3,963, an additional $161 per month or $1,932 per year.

What factors impact mortgage rates?

Mortgage interest rates fluctuate on a regular basis and those changes are driven by a number of factors both in and out of our control. The economic climate and Federal policy decisions influence the rise and fall of rates along with personal factors such as your credit score, home location, mortgage type, and more. Here is a closer look at those variables:

Economic factors

• Inflation: Inflation tracks how much the cost of goods and services increases from year to year. As prices rise, banks and lenders often raise interest rates to ensure they can profit from loans.
• Supply and demand: Competition in the housing market can also influence mortgage interest rates. High demand for home loans can lead to higher rates, and vice versa.
• Treasury yields: The rate on 10-year Treasury notes serves as a benchmark for mortgages and other long-term loans. Lenders may use these bonds as a reference when they set interest rates, which are generally 1 to 2 percentage points higher than 10-year Treasury notes.
• Unemployment: Job growth can reflect how the economy is faring. If unemployment is low, borrowers may feel more confident in taking out a home loan, and rates could trend upward. If unemployment is high, it might indicate the economy is less stable and discourage borrowing, leading to lower interest rates.

Personal factors

• Property location: Location isn't only important for where you buy a house; your rate can vary depending on where you're mortgage-shopping. Research has shown that rates vary state by state due to the number of lenders in the area, local competition, and the cost of living in a given town or city. If the cost of doing business is higher in your area, the mortgage cost will likely be higher as well.
• Home price: The property you're buying may come with a higher interest rate if the loan will be unusually high or low. A lender faces more financial risk with a larger loan if you default, so the interest rate might be higher to offset that risk. Or, in some cases, a very low loan amount might not offer the return that would make it financially sound for the lender, so the rate might be higher to cover the cost.
• Financial history: Factors like your credit score and debt-to-income ratio (DTI) help lenders predict how likely you are to repay your loan. Fannie Mae accepts a DTI of 36% or less in most cases but allows up to 45% for borrowers who meet other requirements for credit score and cash reserves.
• Loan specifics: The loan amount, term, and type all play a role in the interest rate you'll pay. Lenders charge different rates for 15-year vs. 30-year terms, conventional vs. government-backed loans, or larger loan amounts. For example, a $500,000 mortgage with a 30-year repayment term could have a 6.70% interest rate while the same amount with a 15-year term might have a 5.90% mortgage rate. While your monthly payment would be higher, your total interest cost would be less over the repayment term.
• Interest rate: You might be able to choose a fixed or adjustable mortgage rate. Fixed rates are the same for the duration of the loan, making them more predictable over the long term. Adjustable rates may initially be lower for a set period before adjusting to market conditions at intervals.