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Buyers should keep an eye on the possibility of rate cuts in the next few months.
Tharon Green/CNETMortgage rates are holding near a two-month low, with average 30-year fixed rates having fallen just below 6.7%, according to Bankrate data. After weeks of hovering close to 7%, it's a positive sign in today's unaffordable housing market. But it's unclear how much staying power the recent decline will have.
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. Ongoing economic uncertainty caused by the Trump administration's trade measures, deficit spending and geopolitical maneuvering has kept bond yields elevated and Federal Reserve interest rate cuts on hold.
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.
For now, market watchers are still eyeing September for a Fed reduction. But that still won't be a magic cure for the housing market. Mortgage rates would need to fall substantially from current levels to encourage homebuying demand, said Beth Ann Bovino, chief economist at U.S. Bank.
Do Fed rate cuts equal lower 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. Fed Chair Powell has reaffirmed a "wait and see" posture, with concerns over the inflationary impact of tariffs.
Despite widespread pleas for lower consumer borrowing costs, including from the White House, the Fed held interest rates steady for the fourth consecutive time this year at its monetary policy meeting on June 18.
"With inflation data still sticky and tariffs ongoing, the consensus possibility remains a first cut in September, if not later," said Erin Sykes, housing economist and founder of Sykes Properties.
How do tariffs affect 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.
"Even though many of the tariffs are in place, some of the big ones have yet to take effect," said Bovino. 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, according to Bovino.
Plus, with recession risks still on the horizon, people who are nervous about finances will be more reluctant to take on mortgage loan debt.
How does war influence 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.
Logan Mohtashami, lead analyst of Housing Wire, said that traders mostly saw the bombing of Iran's nuclear facilities as a short-term event, muting its impact on the bond market and oil prices.
A short confrontation based on air strikes is not the same as a sustained battle with boots on the ground, said Matt Graham of Mortgage News Daily.
According to Graham, 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. Most importantly, if the conflict causes inflated prices, it can cancel out any positive impact on rates.
Will the housing market become affordable?
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.
"Prices are still incredibly high," Bovino said. "Add to that the borrowing costs of a mortgage, and it's prohibitively expensive for most people to get into the housing market." Plus, with recession risks still on the horizon, people who are nervous about finances will be more reluctant to take on mortgage loan debt.
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.
While market forces are out of your control, there are ways to make buying a home slightly more affordable. Last year, nearly half of all homebuyers secured a mortgage rate below 5%, according to Zillow.
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. A credit score of 740 or higher will help you qualify for a lower 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. If you can afford it, a down payment of at least 20% will also eliminate private mortgage insurance.
💰 Shop for mortgage lenders. Comparing loan offers from multiple mortgage lenders can help you negotiate a better rate. Experts recommend getting at least two to three loan estimates from different lenders.
💰 Consider mortgage points. You can get a lower mortgage rate by buying mortgage points, with each point costing 1% of the total loan amount. One mortgage point equals a 0.25% decrease in your mortgage rate.
Watch this: 6 Ways to Reduce Your Mortgage Interest Rate by 1% or More
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