Despite two rate cuts by the Federal Reserve in 2025, mortgage rates remain stubbornly above 7%. It is leaving many Americans puzzled. The culprit? Lingering inflation fears, bond market volatility, and lender caution.
“We expected relief, but the market isn’t responding the way it used to,” said housing economist Dana Rios.
What’s the Fed Doing?
The Federal Reserve has lowered its benchmark interest rate twice this year. They have been bringing it to 4.75%. Historically, this would lead to lower mortgage rates, as lenders adjust pricing based on cheaper borrowing costs.
But in 2025, that correlation is breaking down.
- Fed Funds Rate: 4.75% (↓ from 5.25%)
- 30-Year Fixed Mortgage Rate: 7.1% (↔ unchanged)
- Inflation Rate: 2.6% (↓ cooling)
- Bond Yields: Volatile, with 10-year Treasury hovering near 4.9%
Why Mortgage Rates Aren’t Falling
1. Bond Market Volatility
Mortgage rates are tied to long-term Treasury yields. If the bond yields rise, mortgage rates follow. Despite Fed cuts, investors are demanding higher yields due to uncertainty about inflation and fiscal policy.
“The bond market doesn’t trust the Fed’s long-term control over inflation,” said analyst Marcus Lee of Fitch Ratings.
2. Lender Risk Aversion
Banks and mortgage lenders are pricing in risk premiums, fearing defaults if the economy slows. This leads to higher rates to protect margins, especially in a cooling housing market.
3. Sticky Inflation Expectations
Even though inflation is cooling, expectations remain elevated. Consumers and investors still fear a rebound, which keeps pressure on long-term rates.
Impact on Homebuyers
Affordability is shrinking. With rates above 7%, monthly payments on a median-priced home ($420,000) are nearly $2,800/month, up from $2,100 just two years ago.
- First-time buyers are delaying purchases
- Refinancing activity is down 42% YoY
- Homebuilders are offering rate buydowns and incentives
“We’re seeing a freeze in the starter home market,” said Redfin’s September 2025 housing report.
Data Snapshot
| Metric | Sept 2025 | Trend |
| 30-Year Mortgage Rate | 7.1% | ↔ Flat |
| Fed Funds Rate | 4.75% | ↓ Cut twice |
| Inflation Rate | 2.6% | ↓ Cooling |
| 10-Year Treasury Yield | 4.9% | ↑ Volatile |
| Home Sales (YoY) | -18% | ↓ Declining |
Sources: Freddie Mac, Federal Reserve, Redfin, Bloomberg
What Experts Recommend
- Lock Rates Early: If you’re buying, lock your rate now before further volatility.
- Watch Treasury Trends: Mortgage rates follow the 10-year yield more than the Fed’s rate.
- Consider ARMs: Adjustable-rate mortgages may offer lower initial payments, but come with risk.
“This is a time for strategic borrowing, not emotional buying,” said mortgage strategist Carla Nguyen.
Final Thoughts
The mortgage rate mystery is a symptom of deeper market anxiety. While the Fed is easing, investors and lenders aren’t convinced inflation is under control. “We’re in a new era of rate dynamics,” said Rios. “Old rules don’t apply.”
