Many people are watching mortgage rates for 2025, hoping that a drop in interest rates will spur more home purchases.
Mortgage rates are down one-and-a-half percentage points over the past 12 months, which is good news for anyone looking for a purchase or refinance loan. Purchase applications have started to increase, but the growth has been slow. Weekly data from the Mortgage Bankers Association has shown small increases. Data from the week of Oct. 9 revealed purchase applications up 8% year over year.
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The bigger story is refinancing. When mortgage rates rose sharply in 2023, refinancing essentially stopped. This was devastating for the mortgage industry, prompting widespread layoffs. Things are starting to turn at a rate faster than the purchase side. The Mortgage Bankers Association’s Refinance Index was up 159% year-over-year for the week of Oct. 9.
This figure aligns with Optimal Blue's September 2024 Market Advantage report, which found a 50% month-over-month increase and an over 700% increase in rate-and-term refinance activity. This was the highest rate since January 2022. Much of the refinancing growth is coming from borrowers who obtained loans at recent high rates. The ICE Mortgage Monitor reported that two-thirds of recent-vintage payments go directly to interest, providing a strong incentive to refinance at better terms.
What Could 2025 Bring For Mortgage Rates?
The big question mortgage lenders are wondering about is whether there will be another Federal rate cut in November. A second cut of either 25 or 50 basis points could help lower mortgage rates. Lawrence Yun, Chief Economist at the National Association of Realtors®, has said that mortgage rates have already anticipated the Fed’s path.
Most economists are not forecasting a dramatic rate drop for 2025. Fannie Mae anticipates 5.7% at the end of 2025 and the Mortgage Bankers Association forecast calls for a similar number, 5.8%. These numbers may shift over the next couple of months but are unlikely to change significantly.
That would be enough to encourage more refinancing activity among people who purchased a home during the last two years but wouldn’t affect the majority of mortgage holders who still have a mortgage under 5%.
Will Cash-Out Refinancing Lead To Remodeling?
When refinancing, home equity loans and HELOCs drop, so does the type of projects people get these loans for, including large home remodeling projects. There are two types of refinancing: rate-and-term refinancing, which often gives you a lower payment and a shorter term and cash-out refinancing, which includes a lump sum payout.
The Joint Center For Housing Studies of Harvard University produces the Leading Indicator of Remodeling Activity report each quarter. For the past several quarters, remodeling has been much lower. During the pandemic, when many people were stuck at home, they spent a lot of time and money on home improvement projects. The report for the second quarter of 2024 forecast that spending declines would settle at 0.05% by the second quarter of 2025.
Real estate consulting firm John Burns Research & Consulting says a rising amount of cash-out refinancing is a strong indicator of remodeling activity. The firm showed that cash-out refinances peaked at the end of 2021, representing 29% of all loan locks. Homeowners whose homes have appreciated rapidly over the past several years may be able to tap into that equity to make repairs.
If you are planning to refinance your home in 2025 and are waiting for a favorable rate, now is the time to prepare. Like a purchase mortgage, getting a favorable term for refinancing can depend on your credit score. You also don’t have to use the same lender you used for your original loan. You can shop around until you find the rate and terms that work for you.