Americans Are More Optimistic on Mortgage Rates: Here’s Why

It’s been a bumpy ride for home buyers/mortgage borrowers over the past several months. That’s because the average rate for the benchmark 30-year fixed-rate mortgage loan has seesawed up and down over the past year, hitting a high of 7.22% last May before dipping down to 6.08% in late September 2024. In recent weeks, current mortgage rates have inched back up, averaging close to %.

But while spring may be far off, “hope springs eternal,” as they say – and that axiom can be applied to mortgage matters. The proof? Recent data show that more consumers are optimistic about mortgage rates dropping compared to a year earlier, despite the recent rise in rates. How significant is this news? Is this positivity warranted? For that matter, where are mortgage rates headed in the near term and across 2025?

Taking a closer look at the latest findings

Fannie Mae’s Home Purchase Sentiment Index (HPSI), updated and published monthly, reflects consumer confidence in the housing market and the overall economy – tracking views on home buying, selling, mortgage rates, and financial outlooks. It provides insights into market trends, with a higher HPSI score indicating optimism and a lower score signaling concerns. Fannie Mae describes it as a “composite index designed to track consumers’ housing-related attitudes, intentions, and perceptions, using six questions from the National Housing Survey.”

In Fannie Mae’s latest report (December 2024), the HPSI fell by 1.9 points to 73.1, which is still significantly higher than a year ago. The reason? Positive expectations around mortgage rates. Consumers remain hopeful that rates will dip over the next 12 months, with 42% anticipating a reduction (versus only 25% who expect rates to climb), up from 31% tallied in December 2023 (although down from 45% in November). Consider that the HPSI overall has risen by 5.9 points compared to December 2023.

What the findings mean

The fact that 42% of Americans polled expect mortgage rates to drop may not sound like a whopping number, but compared to that HPSI score tallied a year earlier (31%), that’s about a 35% improvement in positivity about where rates are trending.

“The Fannie Mae report suggests that consumers anticipate a potential decline in mortgage rates and foresee a stabilization in the housing market through a better balance between supply and demand. This perception points to growing confidence that the peak of rate hikes may have passed,” explains Albert Lord, founder/CEO of Lexerd Capital Management. “For prospective home buyers, this improved sentiment fuels expectations that mortgage rates will either plateau or begin to decrease – which could increase housing demand. The belief that borrowing costs are stabilizing may encourage potential purchasers to enter the market sooner, anticipating more favorable conditions in the months ahead.”

David Milo, owner of Independent Lending, agrees that this latest HPSI report is a good sign for home shopper candidates.

“The data reflect a notable shift in consumer sentiment, underscoring a broader perception that mortgage rates may be stabilizing or decreasing. Even slight improvements in rate expectations can have a multiplier effect on purchasing activity and refinance considerations,” he says.

Make no mistake: The fact that optimism about future mortgage rate declines is growing can be a powerful signal.

“Would-be buyers should find encouragement in this because consumer expectations often lead market behavior,” notes Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College. “Lenders may react by offering more competitive products or incentives, especially as demand dynamics shift.”

Consider that, when confidence about lower rates aligns with easing inflation, it’s a precursor to more favorable borrowing conditions, adds Shirshikov.

Why Americans are more optimistic about rates

Digging deeper, what’s behind this latest trend of rate hopefulness? The experts point to plenty of factors.

“As we enter a new year, there’s new optimism as markets begin to stabilize and we move further away from the pandemic,” Vandy Fartaj, chief investment officer with CrossCountry Mortgage, says. “Many people are beginning to feel a return to normalcy, especially in the housing market.”

Lord insists this positivity isn’t attributable to a single factor but instead a combination of influences:

• There is growing belief that the Federal Reserve will proceed with planned rate cuts in 2025, driven by a strong job market and controlled inflation.
• Economic growth is expected, supported by a rise in U.S. production and reduced reliance on imports.
• Mortgage rates have declined from mid-2024 peaks.
• Consumers are shifting their mindset, feeling the era of sharp rate hikes is perhaps behind them.
• Housing market sentiment is improving due to higher inventory and new developments.

“Additionally, positive media coverage about improving economic conditions and housing affordability could also be bolstering consumer sentiment,” continues Milo.

Also, seasonal trends – such as lower housing activity during the winter months – can often push lenders to become more competitive, providing consumers with a sense that opportunities are just around the corner.

Is this mortgage rate optimism warranted?

But are Americans misguided in their more positive feelings about mortgage rates? Do the experts share their hopeful sentiments?

Consumers deserve to feel better about rates and should remain hopeful, yet understand that mortgage rates may not drop drastically and should focus instead on locking in favorable terms when opportunities arise, per Milo.

“While it’s encouraging to see inflation cooling, many variables – like geopolitical events or unexpected economic shifts – could influence rates unpredictably,” he cautions.

It’s encouraging that the American economy continues to outperform other developed nations, demonstrating strength and resilience; however, concerns linger about possible inflationary pressures from factors like reduced consumer spending, tariffs, and rising wages caused by policy changes or labor shortages.

“In fact, last Friday’s strong employment data revived expectations that interest rates will remain elevated. Additionally, upcoming reconstruction in Los Angeles may tighten the labor market by causing regional job shortages and capital shifts, fueling inflation.”

Where might mortgage rates be headed?

In the short term, it’s pragmatic to anticipate that mortgage rates may remain relatively higher despite increased confidence and as the Federal Reserve slows down its path of rate cuts.

“But over the medium to longer term, mortgage rates should stabilize or head lower toward the end of this year,” Fartaj says.

Mile believes the 30-year fixed-rate mortgage will average around 6.5% to 6.7% in the first quarter of 2025, gradually lowering to 5.5% to 6.0% in later 2025, with the assumption that inflation continues to drop as the Fed adjusts its monetary policy.

Shirshikov envisions a slightly wider average range: 6.25% to 6.75% for the 30-year home loan over the next few months before dropping to 5.75% to 6.0% by the end of 2025.

How to get the best mortgage loan deal

While you have no control over mortgage rates and may have to lock in at a rate that could be higher than your target if you want to buy a home this year, you can still reap significant savings by following best practices. Try these tips:

• Shop around to find the best deal. That means comparing quotes from multiple lenders, including local banks, credit unions, and online lenders.
• Improve your credit score. Aim for a score above 740 to qualify for the lowest rates. “Paying down debt and resolving errors on your credit report are great first steps,” suggests Milo.
• Consider paying for one or more discount points. A discount point on a mortgage costs 1% of the loan amount and typically lowers the interest rate by approximately 0.25%. For instance, on a $200,000 loan, purchasing one point would cost $2,000. While this upfront cost can reduce monthly payments over time, deciding to buy points depends on how long you intend to stay in the property.
• Monitor rate trends. “Partner with a knowledgeable and trusted lender who can help you identify the right time to lock in your rate based on market conditions,” Milo adds.
• Consider different loan types. See if you qualify for a government-backed loan like an FHA, USDA, or VA loan as well as a conventional loan. Also, look into an adjustable-rate mortgage or a loan with a shorter term, which may yield better rates.
• Increase your down payment if you can afford it. The more money you put down, the less you’ll have to borrow and the lower your interest rate could be, which means paying less in total interest over the life of the loan.
• Explore homebuying assistance programs. Local programs in your area may offer down payment assistance and other help if you qualify.

The bottom line

If you feel a bit more optimistic about mortgage rates, you’re not alone. But remember that rates are only one piece of the puzzle. It’s crucial to also secure a mortgage loan with favorable terms offered by a lender you trust.

In addition, even if you have to lock in at a rate that’s higher than you’re comfortable with, remember that you may be able to refinance if rates drop down the road.

“And even if rates don’t drop significantly, remember that securing a home now instead of waiting could mean capitalizing on home value appreciation opportunities, which will enable your equity to grow more quickly,” adds Milo.