How Federal Reserve Rate Decisions Impact Mortgage Rates in 2025

26 4 minutes read

When the Federal Reserve Board met in May, interest rates didn’t budge from its benchmark range of 4.25% to 4.5%. An unchanged rate might not mean much, but it influences all lending products, including mortgage rates.

The Federal Reserve, or Fed, is the central bank of the United States. It regulates the country’s financial system. The Fed’s decisions could signal either economic growth or a potential downturn.

One of the most critical discussions during the May meeting of the Federal Open Market Committee (FOMC) was whether to change the interest rate. An interest rate increase is a sign that our economy is doing well. Rising interest rates typically indicate that unemployment is holding steady. The Fed raises rates to maintain economic stability if inflation is too high. It’s a signal to slow down the growth that’s causing our economy to move too fast.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.

Profit and prosper with the best of expert advice – straight to your e-mail.

For most folks, Fed meetings may not seem to carry much weight. But the outcomes of these meetings — especially when it comes to interest rates — affect all consumers, especially those on the hunt to buy a home.

How Federal Reserve policy affects mortgage rates

The Fed doesn’t set mortgage rates or other consumer lending rates directly. However, when the central bank changes its benchmark interest rate, lenders and financial institutions often adjust their own rates in response.

For example, if the Fed raises interest rates, you might see a boost in your high-yield savings account’s annual percentage yield (APY), meaning you’ll earn more money on your savings. But it also means that if you need to take out a loan — like a mortgage or auto loan — your interest rate could be higher than someone who borrowed earlier.

A drop in interest rates typically signals that the Fed wants to encourage consumer spending. After all, the less you pay in interest, the more likely you are to borrow and spend. Lower interest rates indicate to potential buyers that, with strong credit, they could secure a better mortgage rate than someone who purchased a home earlier this year.

While the 10-year Treasury yield has more influence over mortgage rates than the Fed’s benchmark rate, both play a role in shaping lender decisions to raise or lower interest rates.

Curious about today’s rates? Explore and compare some of today’s mortgage products with the tool below, powered by Bankrate.

Mortgage rate trends in 2025: What homebuyers should know

As of June 16, the average rate for a 30-year fixed-rate mortgage was 6.84%, and 5.97% for a 15-year fixed-rate mortgage, according to Freddie Mac.

At this time last year, rates started to slowly drop. By September, the 30-year fixed-rate mortgage dropped to 6.08% — the lowest rate since February 2023. Rates then rose nearly a percentage point by January, reaching 7.04%. A 15-year fixed-rate mortgage was 6.27% at that time.

We may never see the 2% to 3% mortgage interest rates during the early years of the COVID-19 pandemic again. Current rates are roughly double the all-time lows from 2020 and 2021.

Prospective homebuyers are facing tough decisions about how to afford new homes. The median home sale price for the first quarter of 2025 was $416,900, according to the Federal Reserve Bank of St. Louis. That’s a significant jump from the second quarter of 2020, when the median was $317,100 — an increase of nearly $100,000 in five years.

Home prices peaked at $442,600 in the fourth quarter of 2022 — the highest level on record — and have fluctuated since then.

Even as home prices have increased and interest rates have edged upward, the federal minimum wage remains $7.25 an hour — the rate it’s been since 2009. While incomes have stagnated, the cost of living has risen, making it harder for would-be buyers to save for a home.

What happens to mortgages if the Fed raises rates?

(Image credit: Getty Images)

If interest rates go up, it becomes more difficult for folks to buy a home. It can also lead to longer wait times for homes already on the market to sell. In April, the median time a home sat on the market was 50 days, according to the Fed. This time last year, it was 45 days.

Higher interest rates mean home affordability may decline. Homebuyers are less likely to refinance their current mortgages.

Home prices may drop, which is good news for potential buyers but bad news for sellers looking to maximize profits. However, a drop in home prices doesn’t necessarily mean lower monthly payments.

For example, consider a $417,000 home with a 10% down payment and a 6.8% interest rate.

Now compare that to a $407,000 home with the same 10% down payment but a higher interest rate of 7.8%. Despite the lower purchase price, the higher interest rate leads to a larger monthly mortgage payment — $2,971 compared to $2,788.

Swipe to scroll horizontally

Home price	Down payment	Interest rate	Est. monthly payment
$417,000	$41,700	6.8%	$2,788
$407,000	$40,700	7.8%	$2,971

Even as the home price dropped, a slightly higher interest rate shows larger monthly mortgage payments than homes with a lower interest rate.

What happens to the housing market if the Fed holds or cuts rates?

An interest rate cut means more homebuyers might be more inclined to sell their homes or refinance their current mortgages. Lower rates often stimulate the housing market by increasing demand, which can drive up both home sales and median sale prices.

Prospective buyers who are watching the market for a rate drop may choose to wait a bit longer before making a purchase in hopes of locking in a lower rate. There’s a possibility the Fed could cut rates later this year, especially as economic uncertainty has increased since its earlier meetings.

Bottom line

Whether you’re buying your first home, considering a refinance or simply watching the market, understanding how Federal Reserve policy affects interest rates can help you make informed financial decisions.

While mortgage rates remain elevated compared to pandemic-era lows, they’re still shifting in response to broader economic conditions. Keeping an eye on upcoming Fed meetings and economic indicators could give you a clearer picture of when the right time to act might be.

Source link