The decline in rates in 2025 reflects a combination of Federal Reserve rate cuts, lower 10-year Treasury yields, and a narrowing spread between these rates and conventional 30-year mortgage rates – which are historically correlated due to their long-term horizon.
“It wasn’t that long ago that 10-year government bond yields were close to 5%; we stayed at 4.50% for a while and now we’re in the 4.15% range,” said Joseph Panebianco, CEO of AnnieMac Mortgage. “A lot of that reflected the market lowering its inflation expectations, but there is also something called the term premium – the extra compensation investors demand for long-term risks – and that has fallen too.”
Mortgage spreads also fell during the year, which HousingWire lead analyst Logan Mohtashami has called the “hero” of the 2025 housing market. Unlike last year, spreads never approached the 3.60% level.
Drop in rates, peak in refis
Bee Atlantic Bay Mortgage GroupChief Lending Officer Emily Gardner said the company was able to take advantage of periodic interest rate drops throughout the year to secure refinance loans, with cash-out refinances proving particularly popular.
“Rates being lower overall this year, especially in the second half, helped our purchasing activity remain strong,” Gardner said. “People have realized that interest rates will no longer be 3% and inventories have increased. 2025 has been a good year and we are optimistic for the year ahead.”
Gardner added that non-qualified mortgages gained popularity through the broker channel in 2025, including debt service coverage ratio (DSCR) loans aimed at investors and second home buyers.
According to Panebianco, competition among lenders is another factor determining interest rates in 2025 and beyond. In recent years, some lenders have cut margins to gain market share, creating pricing pressures that push weaker competitors out of the market. That said, some lenders may temporarily offer more aggressive pricing on certain products, a dynamic that continues to play out daily, he added.
“We are at a stage of the game where the players that remain have the capital base to withstand the presence,” Panebianco said. “But most of those big players realized it was a short-lived experiment,” Panebianco said.
What’s next?
Looking ahead to 2026, industry experts expect the first half of the year to be relatively stable from a monetary policy perspective, as Fed Chairman Jerome Powell’s term ends on May 16. President Donald Trump is expected to announce a replacement in early 2026.
“We probably won’t see much movement in rates one way or the other,” Panebianco said, noting the outlook could change if jobs or inflation numbers show sharp shifts. “I am more optimistic about lower mortgage rates in the second quarter than in the first half.”
About 87% of monetary policy observers expect rates to remain unchanged at the Federal Reserve’s January meeting CME Group’s FedWatch tool – a forecast that remained stable after the release of gross domestic product data on Tuesday.
Association of Mortgage Bankers (MBA) Chief Economist Mike Fratantoni said that while “lingering effects of the government shutdown continue to impact key data,” inflation measures in the GDP report showed a rebound from the second quarter, with the core personal consumption expenditure (PCE) index rising to 2.9%.
“These data, together with the recently released employment and CPI figures, show an economy that is growing, but unevenly, and an economy where inflation is still well above the FOMC target,” Fratantoni said in a statement. “We predict the FOMC will postpone its January meeting and will likely cut rates just once more next year.”
MBA predicts that mortgage rates will remain in a relatively narrow range over the next few years, between 6% and 6.5% – a scenario that becomes more likely as the Fed nears the end of its easing cycle. Fannie MaeAccording to the November forecast, mortgage interest rates will be around 6%.
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