Market Shift - Are the Stars Finally Lining Up for Mortgage Interest Rates to Drop?
Are the stars finally lining up for mortgage interest rates to drop?
There are two answers to that question.
Short answer: Yes.
Rates are expected to begin dropping in September, and the trend may continue through the next 12 to 18 months.
If you’re considering a refinance, cash-out refinance, or even a home purchase, let me know — I’ll add you to my watch list so we’re ready to strike when the timing is right.
The long answer is YES, and here is why. (Grab some popcorn and let’s dig in)
Let’s get under the hood of how mortgage rates are set — because once you understand how this game is played, it becomes easier to see how to win in this market.
There are three big players in this story:
The Federal Reserve
Inflation
And you, the consumer
1. The Federal Reserve — the bank for banks
The Federal Reserve is not where you or I deposit money. It’s business-to-business only. They set the Federal Funds Rate, which is the short-term interest rate banks use to lend money to each other.
After the pandemic, inflation exploded to nearly 10%, so the Fed hiked their rate — all the way up to 5.75% — to cool down the economy. As of now, it’s down slightly to around 4.375% (source).
This move made borrowing more expensive across the board — credit cards, auto loans, home equity lines, and yes, mortgage rates. The goal? Slow you down. If interest rates jump from 2% to 8% on a car loan, or from 12% to 25% on a credit card, most people stop spending.
And that’s exactly what the Fed wants.
Less spending → More inventory → Lower prices → Controlled inflation.
2. The inflation target is 2%. We’re at 3%. So why hasn’t the Fed blinked?
You’d think 3% is close enough. But the Fed isn’t in a hurry. And here’s why: uncertainty.
Things like:
Trump’s proposed tariffs
The 2024 election aftermath
And even who’s compiling the monthly jobs report
All this creates unknowns.
Right now, inflation is around 3%, but when tariffs on imports go into effect, the price of everyday goods could rise. That would push inflation right back up — the very thing the Fed is trying to prevent.
And Trump’s not staying quiet. He’s publicly floated firing Jerome Powell, the head of the Federal Reserve, for not lowering rates fast enough. At the same time, he’s also replaced the chief statistician responsible for compiling the jobs report, saying it’s not accurate.
He believes his tariffs will create American jobs and generate revenue to help pay down the national debt. The Fed is more cautious. They don’t want to risk overheating the economy again.
AP: Trump pressures Fed, targets Powell & tariffs
CNBC: Fed holding rates despite inflation easing
3. How mortgage rates are really set
Now, let’s get into the part that affects you most: mortgage rates.
Say you're a bank. You have $10 million to lend. You could:
Park it at the Fed and earn 4.375% risk-free, or
Lend it to a homeowner and take on the risk of missed payments, foreclosures, servicing hassles, taxes, and insurance.
So what do banks do?
They charge extra to cover that risk — what’s called a margin. Typically, this margin is about 2%. And here’s the important rule of thumb:
Mortgage rates are typically 2% higher than either the Federal Funds Rate or inflation — whichever is higher.
Right now:
Rate Type Value
Inflation Rat ~3.0%
Fed Fund rate ~4.375%
Bank Margin +2.0%
Mortgage Rate ~6.375%–6.75%
*Freddie Mac: Current 30-year mortgage average
*Investopedia: How rates are determined
4. What happens if the Fed cuts rates?
Let’s run the math.
If the Fed lowers the Fed Funds Rate to 3%, and banks keep their 2% margin, we should theoretically see mortgage rates around 5%. They will not drop from 4.375% to 3% overnight, but begin the trend downward. And Wah La
That kind of drop would change everything:
Refinances flood back
Buyers re-enter the market
Homeowners tap into their equity
Builders gear up for new construction
And the economy gains serious momentum
HousingWire: Markets expect rate cuts by fall
5. Why I believe it will happen
We’ve been hovering at ~3% inflation for over six months.
Jobs data is softening.
And mortgage demand is quiet — but waiting.
The Fed just moves slow. They’re cautious.
They tend to look at where the hockey puck was, not where it’s going.
But when they do move — I believe rates will come down quickly, and opportunity will open up fast.
Bottom line: Let’s be ready when the stars align
I believe we're close to a pivot point.
The Fed may still be waiting, but the data is stacking up. And when the cut finally comes, you want to be ready.
Let me know if you want me to add you to my watch list. I’ll track the data, keep you informed, and let you know the moment it makes sense to move.
