Many factors influence the interest rate you get on a mortgage loan, including your credit history, income, the amount you borrow, and the size of your down payment. Average loan rates across the country also play a role — and those tend to rise and fall with inflation. Even the most well-qualified borrowers could receive a higher interest rate during periods of high inflation.

To be clear: Inflation doesn’t directly impact mortgage interest rates, but the two are related. Understanding how inflation affects mortgage rates can help you make the best borrowing decisions. The July Consumer Price Index (CPI), a key measure of inflation, shows that “core” inflation (which omits energy and food) experienced the largest gain in six months. So, how will this increase affect home loan rates?

Learn more: How are mortgage rates determined?

In this article:

What is inflation?

Mortgage rates and inflation

The Federal Reserve’s role

The inflation report and mortgage rates

How inflation affects the housing market overall

FAQs

Before understanding how inflation affects mortgage rates, it’s first essential to know what inflation is and how it’s measured. At its most basic, inflation is the general rise in goods and services costs over time. In short: It’s the reason your grandparents could purchase a home for just $20,000 in the 1960s (that same amount now translates to over $200,000 in 2025 dollars.)

In the U.S., inflation is measured by two different economic indexes: the Consumer Price Index, or CPI, and the Personal Consumption Expenditures price index, or PCE. The Bureau of Labor Statistics uses the CPI to measure the price changes that everyday Americans face. The Federal Reserve primarily uses the PCE to determine policy strategy, as it measures the change in pricing on all items consumed within a given period — not just the out-of-pocket consumer expenses.

Mortgage rates are always in flux, but the average rate on 30-year mortgage loans in Q2 2025 was 6.79%, according to data from Freddie Mac. That’s down slightly from the Q1 2025 average of 6.83%.

These rate fluctuations are partially tied to inflation and the policy changes the Federal Reserve makes in response to monthly inflation readings. We’ll discuss these policy changes and their impacts below.

Learn more: Mortgage rates history — See how rates have changed over time

Since its founding in 1913 via an act of Congress, the Federal Reserve has been tasked with maintaining economic stability in the United States, specifically regarding inflation. That’s because too much or too little inflation can cause economic distress.

On the other hand, consumers don’t spend as much money when inflation is low or stagnant, not even when prices are lowered to tempt more people to make purchases. Low inflation can be a sign of tough economic issues, meaning people might be out of a job or facing other financial problems that keep them from buying goods.

Both high and low inflation can be bad for the American economy and the general consumer. The Fed works to keep inflation at a healthy rate of approximately 2%, most notably by setting the federal funds rate, which is the interest rate that banks charge when they lend to other banks.

Banking institutions must keep a cash reserve representing a percentage of their total deposits. When they do not have a large enough reserve on any given day, a bank facing a shortfall can borrow from another bank that’s experiencing a surplus.

These loans are made overnight simply so the borrowing bank can meet the cash reserve requirements the next morning. And just like a consumer loan, the borrowing bank has to pay interest on the loan to the lending bank.

The benchmark interest rate banks charge each other for these overnight loans is called the federal funds rate. When lending to consumers, on the other hand, banks offer interest rates based on the federal funds rate plus additional margin to ensure they make a profit. That’s why interest on mortgages and other consumer loans is typically higher than the federal funds rate.

The Federal Reserve adjusts the federal funds rate to help shape the country’s economy. When inflation is high, the Federal Reserve might increase the federal funds rate in an effort to slow down inflation. The thought is that fewer people will borrow money when rates are higher, which can help reduce the influx of cash into the economy and thereby stabilize inflation.

According to the July CPI, the “core” CPI increased by 0.3% since last month, which is the largest gain in six months. This fact alone may lead people to believe the Fed will keep the fed funds rate stagnant at its September meeting.

However, the July CPI (which includes food and energy, unlike “core” CPI) data was more uplifting. Annual CPI increased by 2.7%, which was unchanged from June and lower than economists’ predictions of 2.8%. Month-over-month inflation was 0.2%, a slowdown from June that met economists’ predictions.

True, the “core” CPI is discouraging — but the general inflation numbers are steady enough that it’s still possible the Fed will cut the rate at its Sept. 17 meeting. According to the CME FedWatch tool, there’s roughly a 94% chance that the Fed will lower its rate. If these predictions continue, mortgage rates could drop in the weeks leading up to the September meeting.

Dig deeper: How the Federal Reserve impacts mortgage rates

The Federal Reserve must adjust the federal funds rate in response to economic changes, so it’s impossible to predict when mortgage rates will go down (especially in the long term) since we cannot know future inflation rates. For example, the market downturn that accompanied the onset of the COVID-19 pandemic had a major impact on the American economy — and mortgage rates — and it was impossible to predict.

However, even though we can’t know what future inflation will be, the Federal Reserve does create a regular inflation report to forecast where the economy will go over the coming year and decade. Though this report obviously can’t guarantee the future, it does use known parameters to set expectations for future inflation. As of July 2025 — the most recent inflation data at the time of writing — the Fed forecast 3.1% inflation for the coming year. This is based on various factors, including the CPI and PCE.

This prediction is on par with the February forecast. Inflation forecasts spiked in March, April, and May, then decreased to 3% in June. Now, the number has inched back up to 3.1%.

Read more: How to get the lowest mortgage rate possible

Inflation can certainly impact mortgage rates, but it impacts home buyers in other ways, too. For one, it can send housing prices upward. As the prices of goods and services rise, so do the costs of material and labor to build and sell homes — which means higher home prices for consumers.

Buyers may also face higher prices on various closing costs and third-party services surrounding their purchases, like inspections, appraisals, moving costs, and more, as these can also rise due to inflation.

There is a benefit, though: Inflation — and the higher prices that come with it — could reduce demand for homes and make the housing market less competitive. This could make it easier to snag the house you like without getting into a bidding war or haggling with the seller.

Dive deeper: Which is more important, your house price or interest rate?

Inflation reports such as the Consumer Price Index and Personal Consumption Expenditures price index reports will not directly affect mortgage lenders' interest rates. However, what those reports indicate for the future — and the Federal Reserve’s response to those expectations — will. Generally speaking, as inflation rises, so do interest rates, including those on mortgages.

When inflation rates rise, the Federal Reserve generally increases the federal funds rate, which leads to higher interest rates on consumer borrowing products too. By increasing interest rates during periods of inflation, the Fed helps to slow down consumer spending and get inflation under control.

It is impossible to know for certain where mortgage rates will go in the future since unforeseen events that affect the economy (like COVID-19) cannot be predicted. Based on Fannie Mae’s July Housing Forecast, though, we may see slightly lower mortgage rates in 2025, with the average 30-year rate sitting at around 6.4% by year’s end.

Homeowners usually benefit from inflation, as home prices tend to rise when inflation does. That means they gain more equity and can potentially earn more profit from their homes when it’s time to sell. Home buyers, on the other hand, do not benefit. They typically face higher mortgage rates and higher home prices when inflation increases.

This article was edited by Laura Grace Tarpley.

For months, there was a lot of talk about the possibility of a recession. In April, JPMorgan Research increased the probability of a recession in 2025 to 60%. The company lowered its prediction to 40% in May, which is an improvement, but we still aren’t out of the woods.

Sounds bleak, right? Yet, a recession may be just the kind of economic setback that pushes mortgage rates down.

Clement Bohr, economist with the UCLA Anderson Forecast, recently issued a Recession Watch analysis.

"Every economist out there right now is saying just this tariff policy alone could trigger a recession in the U.S.," Bohr told Yahoo Finance in a phone interview. However, he added that forecasting a recession is difficult because policy-making decisions by the Trump administration vary day-to-day.

Read more: The best mortgage lenders for low or no down payments

In this article:

What happens to mortgage rates in a recession?

A 50-year history of recessions and mortgage rates

It may only take a slight dip in rates to unlock the housing market

FAQs

"Usually rates come down in a recession," Bohr said. "But it's not always the case, or at least if we look at what's going to happen this time around, it's not necessarily going to be the case."

Bohr said mortgage rates usually come down in a recession because, as the stock market becomes more volatile, investors shift their portfolios into government bonds. This pushes the prices of the bonds up — and yields (interest rates) fall.

What may be different this time?

"The shock that's going to trigger this recession is also a shock that's going to boost inflation, at least over the short term," Bohr added. If the trade war with China causes supply chain interruptions, Bohr said the risk of inflation might put the Federal Reserve in a position to not lower rates any further.

With the counterpressures of possible inflation and potential recession, mortgage rates may not move much.

"I would be surprised if interest rates go much higher because we have seen now that the administration is sensitive to that," Bohr said.

There's also a chance that the nation experiences a mild or very brief recession, which would likely not impact interest rates.

That's the thing about recessions — you don't know you're in one until it's already underway — or nearly over. The National Bureau of Economic Research declares a recession after "a few months" of data indicating a declining economy.

Learn more: How the Federal Reserve rate decision impacts mortgage rates

There have been seven recessions over the past 50 years. In all of those economic downturns, 30-year mortgage rates eventually dropped. Sometimes, well after a recession.

In the more than yearlong recession lasting from late 1973 to early 1975, rates fell, then rose, then dropped again. In the much shorter, five-month recession of 1980, mortgage rates skyrocketed from 12.85% to over 16% before dropping to nearly 12% as the recession ended.

However, between the end of June 1980 and the beginning of the next recession one year later, rates crept up to 17% and even higher before dropping again.

In the most recent recession, which lasted barely three months in the early pandemic year of 2020, mortgage interest rates barely budged, hovering near the mid-3% range. Yet, as the pandemic lingered, rates eventually fell to 2.65% before climbing to where they are today.

Bohr said that existing home sales have been "stuck" for so long, with homeowners sitting on very low-rate mortgages, that they may be sitting in houses that just don't fit their lifestyles anymore.

"At some point, say even just a 1% decline in the mortgage rate — which would be quite something — may be enough to trigger a lot of them to finally relocate into something that fits them better,” Bohr said. “And they'll just eat the extra couple percentage-point margin in the new mortgage."

With his outlook of mortgage rates not moving substantially higher or lower, it's a nugget of hope for prospective home buyers.

"Even a slight decline in mortgage rates could boost the housing market quite substantially," he said.

Read more: Should you buy a house during a recession?

They generally do, but as you can see from the chart above, most mortgage rate movements — up or down — happen outside the very narrow time frames of recessions.

If you have a fixed-rate mortgage, your payment will remain the same unless changes occur with taxes, insurance, or any other escrow accounts that may be a part of your monthly payment. With an adjustable-rate mortgage, if you are beyond the introductory rate period, your payment may reset with the movement of interest rates at its next periodic rate adjustment.

Most analysts aren't expecting any drastic drops in home loan rates within the next year. Of course, that can change with a dramatic shock to the U.S. economy.

It's not likely. However, few, if any, people can forecast an unexpected economic setback. The pandemic was the most recent example — and the 2008 housing market crash another.

Laura Grace Tarpley edited this article.

When inflation hits your wallet, it's natural to look for someone to blame — and often, the president takes the heat. But how much control does the president really have over inflation? Here’s what you need to know about what causes inflation and who's responsible for managing it.

Inflation refers to the increase in prices for goods and services over time. When prices rise, your purchasing power decreases and your money doesn’t go as far as it used to, making it more difficult to cover everyday expenses, save money, and build wealth.

There are key economic indicators that economists use to track inflation. One of the most common is the Consumer Price Index (CPI).

The CPI measures the average change over time in the prices paid by urban consumers for a fixed basket of goods and services, including food, fuel, housing, energy, clothing, and healthcare.

According to the latest CPI data, the May inflation rate remained flat over the previous month, but rose 3.3% year over year — a deceleration from April's 0.3% month-over-month increase and 3.4% annual gain in prices.

Read more: How to protect your savings against inflation

There are several factors that can cause inflation, including changes to supply and demand, monetary policy, and supply chain disruptions.

For example, inflation can increase when there is widespread demand for goods and services, and that demand outpaces the available supply. When companies can't keep up with the demand, prices skyrocket, driving inflation.

An increase in the money supply can also cause the inflation rate to fluctuate.

“When more money exists, more money tends to be spent, which creates shortages of products and drives up prices,” said Mark Pingle, a professor of economics at the University of Nevada.

The president can influence inflation indirectly through fiscal policy. For instance, tax cuts or stimulus spending can increase consumer demand and raise the money circulating in the economy, which may contribute to inflation. Tariffs can also push prices higher by raising import costs.

However, the main responsibility of controlling inflation belongs to the Federal Reserve, the country’s central bank. More specifically, the Federal Open Market Committee (FOMC) is a committee within the Fed that is responsible for maintaining maximum employment and stable prices in the U.S. It does this by lowering or raising the federal funds rate and buying or selling securities to control the money supply in support of that goal.

The president has some influence here as well, as they are responsible for nominating the seven members of the Board of Governors who serve on the FOMC and oversee the 12 Reserve Banks.

However, it’s important to note that the Fed operates independently of the White House; monetary policy decisions are made based on long-term economic objectives, not short-term political pressure.

Read more: How much control does the president have over the Fed and interest rates?

Rising inflation can have a negative impact on your own personal finances. Pingle explained that inflation is a lot like an income tax because it reduces your buying power. “When the government acts in ways that generate inflation, it does not take your money, but it has the same effect because you are less able to buy,” he said.

For example, say you head to the grocery store for eggs, milk, and bread. The total cost of your groceries is $10. However, when you return to the store next month to buy the same items, the total cost is now $12 due to inflation. That $10 doesn’t go as far as it used to, and more of your income is needed to cover the same essentials.

When inflation is high, it’s important to take steps to mitigate the negative impact on your budget:

Cut out non-essential spending: When prices are higher than normal, looking for ways to free up some cash flow is a good first step. Review your budget and recent bank statements to get a better sense of where each dollar is going. Then, see if there are areas where you can afford to cut back. That way, when essential expenses increase in price, you have the extra money in your budget to cover it.

Look for ways to boost your income: When your monthly expenses increase, you may need to find ways to earn more so your income keeps pace. You might consider making the case at work for a raise or promotion, picking up a side gig, or turning your clutter into cash by selling items you don’t use anymore.

Rethink your savings strategy: Paying more for your regular expenses could mean having to scale back on how much you set aside for savings. However, with the right type of bank account, you can ensure the money you do have saved works harder for you. Check out our lists of the best high-yield savings accounts and CDs that can help your balance grow with today’s top interest rates.

Read more: How does inflation impact savings and CD rates?

Mortgage rates haven’t exactly been affordable lately. The average 30-year mortgage rate has hovered between 6% and 7% for the bulk of the last two years. At one point, it even reached as high as 7.79% — the highest point in decades, according to Freddie Mac.

It’s a far cry from the bargain-basement rates we saw in the height of the COVID-19 era, when rates bottomed out at a mere 2.65%, the lowest ever recorded. Those ultra-low rates were likely a once-in-a-lifetime occurrence, borne from the Federal Reserve’s need to spur economic activity after widespread shutdowns. However, that doesn’t mean mortgage rates are stuck at today’s higher levels forever.

Just when will they drop back down below 6%, though? And should you wait for 6% rates before buying a house? Here’s what you can expect.

Read more: Historical mortgage rates — How do they compare to current rates?

In this article:

What high mortgage rates mean for home buyers

Mortgage rate predictions for 2025 and beyond

When will rates drop below 6%?

How to get a lower mortgage rate in the meantime

FAQs

To understand just how much today’s higher rates impact buyers and borrowers, it’s important to consider home prices, which have been rising steadily for years.

Right now, the median home price sits at $410,800, according to Census data. At a 6.63% mortgage rate — the average for a 30-year term as of Aug. 7 — you’d pay about $2,632 per month on a $410,800 mortgage loan.

And that’s just the mortgage principal and interest. It doesn’t even factor in homeowners insurance, mortgage insurance, or property taxes, which also add to your monthly mortgage payment.

If you took out a 30-year mortgage with a 6.63% rate, the money paid toward the principal and interest on a $410,800 loan in just one year would be a little over $31,500 — accounting for just over half of the country’s median annual earnings.(Generally speaking, you shouldn’t spend more than 25% to 35% of your income on housing costs.)

Assuming you’re getting a 30-year loan term, here’s a look at what you’d expect to pay at various interest rates for a median-priced home today:

As you can see, the difference between a sub-6% rate and today’s rates is pretty significant. Interest rates have been hovering in the mid-to-high 6% range for a while. In this scenario, the difference between a 7% rate and a 6% rate would be $270 per month, or $3,240 annually.

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Fortunately for borrowers, mortgage rates are largely expected to decline this year — at least a little bit. In its July Housing Forecast, Fannie Mae projected a 6.5% average by the end of the third quarter and 6.4% by year’s end.

The Mortgage Bankers Association, a trade organization, is more conservative in its predictions. In July, the MBA forecast a 6.7% rate by the end of 2025. But considering the current 30-year average rate is 6.63%, the MBA may alter this prediction in its August forecast.

Neither organization expects rates to fall below 6% in 2026, though Fannie Mae does call for a 6% average by the third quarter of next year. Whether that happens, though, will depend heavily on inflation and the Federal Reserve’s response to it. According to the central bank’s latest projections, it will likely cut the federal funds rate at least once this year.

“I would expect mortgage rates to stay in the current range until we see what direction inflation is heading,” Jennifer Beeston, executive vice president of national sales at Rate, said via email.

The latest Consumer Price Index (CPI), was released in mid-July, revealing that inflation jumped from 2.4% to 2.7% from May to June. This played a role in the Fed’s decision to keep its federal funds rate steady last month.

“Home buyers can reasonably expect mortgage rates in the 6.5% to 7% for the rest of 2025,” Jeff Taylor, an MBA board member and founder and managing director at Mphasis Digital Risk, said via email.

Dig deeper: How the Federal Reserve impacts mortgage rates

Looking further out, mortgage rates — at least on conventional loans — probably won’t fall to 6% until late 2026.

“In order for conventional mortgage rates to hit below 6%, we need to see a reduction in inflation as well as increased confidence in the continued containment of inflation, which is hard to currently envision given the macroeconomic and geopolitical outlook,” Beeston said.

Aside from tamped-down inflation, Taylor said unemployment would need to rise too.

“This would prompt the Fed to cut,” he said. “Global investors would also need to prove their belief in U.S. Treasury and mortgage bond safe-haven trades if geopolitical conflicts keep escalating, which would push bond prices up and mortgage rates down.”

Two factors also make things even more unpredictable: a potential replacement for Fed Chairman Jerome Powell mid-next year and the long-term impacts of Trump administration tariffs.

“Sub-6% rates are unlikely until we see the inflation impacts of tariffs,” Taylor said. “But rates in the 6% to 6.5% range are possible ahead of the Fed leadership switch in May 2026.”

Learn more: How does inflation affect mortgage interest rates?

Though significantly lower mortgage rates aren’t on the horizon anytime soon, there are still steps you can take to make getting a mortgage more affordable. Here are some tips for getting the lowest mortgage rate possible:

Improve your credit score: A higher credit score generally qualifies you for lower interest rates, as it indicates you’re a lower risk of defaulting on your mortgage.

Make a bigger down payment: When you make a larger down payment, your mortgage lender has less money on the line. The company may reward you with a lower interest rate in return.

Get a rate buydown: Mortgage interest rate buydowns allow you to pay a fee to temporarily reduce your interest rate, usually for the first few years of the loan.

Buy points: Mortgage discount points lower your interest rate for your entire loan term, but you’ll pay an up-front fee. You’ll pay these fees at closing.

Shop around: You can also compare loan quotes from several mortgage lenders. Freddie Mac estimates that getting quotes from at least four lenders can save you around $1,200 annually.

You can also explore a shorter loan term or an adjustable-rate mortgage, which may offer lower rates than the traditional, 30-year fixed-rate mortgage.

If you’re otherwise ready to buy a home but are holding out for lower mortgage rates, it might not be worth the wait. Interest rates probably won’t plummet anytime soon. And remember, you can always buy a house now to start building equity, then refinance into a lower interest rate later.

Read more: Could mortgage rates go back up to 7%? Signs to watch for.

According to their July housing forecasts, the Mortgage Bankers Association projects a year-end average rate of 6.7% on 30-year mortgages. Fannie Mae forecasts an average of 6.4% by the end of 2025.

Fannie Mae predicts that mortgage rates will reach 6% by the third quarter of 2026. Many factors could change those projections, though, including Federal Reserve moves, inflation, tariffs, and employment data.

It is unlikely that mortgage rates will fall as low as 3% again. While this did happen in the post-pandemic years, it was largely due to the Federal Reserve’s need to spur economic activity after widespread shutdowns across the nation.

A $300,000, 30-year mortgage loan at a 6% interest rate would cost about $1,799 per month. (This only covers the principal and interest and doesn’t account for insurance or property taxes.) Across the entire 30-year term, you’d pay a total of $347,515 in interest.

Laura Grace Tarpley edited this article.