The Fed's decisions in the new year could have a big impact on where mortgage rates head next.
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In early December, the Federal Reserve wrapped up the year with another quarter-point rate cut, the third of the year. This rate cut was welcome news for borrowers, as it helped drive down interest rates across a range of borrowing products, from mortgage loans to personal loan rates. And, given today's still-high mortgage rate landscape, prospective homebuyers are likely hoping this latest Fed rate cut signals that there's more meaningful relief ahead when the new year rolls around.
After all, rates may be lower overall, but housing market affordability remains tight enough that there are still millions of buyers on the sidelines. But while Fed policy sets the tone for the broader rate environment, lower Fed rates don't necessarily guarantee lower mortgage rates. Home loan rates respond to a wider set of economic signals, including expectations about where the economy is headed. These forces, in conjunction with Fed rate changes, ultimately determine whether mortgage borrowing becomes easier or remains challenging next year.
So, what should potential homebuyers prepare for as the Fed continues adjusting policy in the new year?
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How Fed policy and economic factors could shape mortgage rates in 2026
Many buyers assume that mortgage rates fall in lockstep with Federal Reserve rate cuts, but the relationship between the Fed rate and mortgage rates is more nuanced. While the Fed influences short-term interest rates, mortgage rates track longer-term Treasury yields — and the 10-year Treasury, in particular — because those yields reflect investor expectations for inflation, economic growth and overall risk.
"Mortgage interest rates went down before the Fed cut rates in September but went up after," says Ali Wolf, chief economist at NewHomeSource. "This is because the Fed is cutting the federal funds rate, which is a short-term interest rate. Mortgage interest rates, on the other hand, are influenced by investors and the yield on the 10-year Treasury."
"The Fed controls short-term interest rates, but mortgage rates are more about how the market expects rates to change over the long term," says Daryl Fairweather, chief economist at Redfin. "Is inflation improving? Is the labor market getting weaker? If the answer to either is yes, then mortgage rates would fall."
Several macroeconomic forces are likely to have an influence on the direction of mortgage interest rates in 2026. Inflation remains the strongest determinant of long-term interest rates. If price growth continues to cool, as it has recently, Treasury yields may ease, which would support lower mortgage rates. But if inflation remains persistent or accelerates, mortgage rates could stay elevated or climb.
Dr. Selma Hepp, chief economist at Cotality, notes that inflation will remain the most important driver.
"If inflation continues to cool, bond markets may price in lower yields, helping mortgage rates fall," Hepp says.
Labor market conditions will also matter in the new year, experts say. A resilient labor market can keep upward pressure on wages and inflation. On the other hand, slower hiring or moderate wage growth could support lower rates, especially if the Fed sees room to continue cutting.
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What homebuyers should prepare for in the new year
The mortgage rate environment could unfold in several ways next year. For example, a notable decline becomes more likely if inflation continues to cool, Treasury yields trend lower and markets expect slower economic growth. Under these conditions, some economists believe mortgage rates could drift toward the high-5% to low-6% range.
However, Wolf cautions that "to see a meaningful decline in interest rates, we would have to see a meaningful decline in the economy," noting that historically, "a slower job market and an economic recession typically correspond with lower interest rates."
Alternatively, if inflation plateaus and bond yields settle into a narrow range, mortgage interest rates may hold steady.
"The most likely scenario is for mortgage rates to stabilize near current levels of 6.3% for a 30-year fixed-rate mortgage," says Fairweather.
Danielle Hale, chief economist at Realtor.com, says mortgage rates are likely to remain relatively stable even if the Fed continues cutting rates.
"The Fed sets a short-term benchmark, but mortgages are longer-term rates affected by investor risk appetite and economic expectations," Hale says.
An increase in mortgage interest rates is also possible, however, if inflation reaccelerates, Treasury yields remain elevated or economic growth outperforms expectations.
"Higher mortgage rates typically accompany a strong economy and increasing inflation," Wolf says.
Housing supply constraints may also continue, as many homeowners remain locked into the ultra-low mortgage rates they secured in 2020 and 2021.
Wolf says a drop from 6.5% to 6.0% could allow "2 million more households across the country" to afford a home, but also notes that if lower rates stem from a weakening labor market, "the more immediate response will be consumers sitting on the sidelines until they feel more comfortable making the largest investment of their lives."
Wolf advises buyers to avoid trying to "perfectly time the housing market," emphasizing that long-term homeownership tends to build wealth.
"If you can afford to buy and intend to stay, focus on time in market versus timing the market," she says.
The decision should also be based on your personal priorities, Fairweather says.
"If waiting means you can save up or if you're expecting to switch to a more lucrative job, then patience may pay off. But if rising rents make you anxious and you see a home that fits your lifestyle, the equation changes," says Fairweather.
The bottom line
Ultimately, the direction mortgage interest rates head in 2026 will depend on a range of factors, like inflation, Treasury yields and the pace of Federal Reserve policy decisions. A mortgage interest rate drop is possible if inflation cools meaningfully, but higher rates remain a credible scenario if economic conditions shift. Since trying to predict rate movements can be risky, buyers may benefit from focusing on affordability rather than timing. If a rate aligns with your financial goals and budget, locking it in may be a smarter strategy than waiting for further declines that may never happen.
Edited by Angelica Leicht
