Will Mortgage Rates Drop to 5% Again? Here's What Experts Think

Mortgage rates have been on a wild ride lately. Just a few months ago, the average 30-year fixed mortgage rate dipped below 6% for the first time since 2022. But that didn't last long. Global events, including conflicts in the Middle East, pushed rates back up toward 6.5%. This back-and-forth has made it hard for people who want to buy a home to know when to make their move.

Right now, the average 30-year fixed mortgage rate sits just under 6.5%. The Federal Reserve has kept its key interest rate between 3.50% and 3.75% as inflation continues to be a concern. Most experts expect the Fed to leave rates unchanged at its upcoming June meeting.

Why Does a 1% Difference Matter?

You might think the difference between a 6% and 5% mortgage rate isn't a big deal. But that 1% gap can mean hundreds of extra dollars on your monthly payment.

Over the life of a 30-year loan, that adds up to tens of thousands of dollars. So even small rate changes can have a major impact on how much you pay for your home.

What Do the Experts Say?

Most experts don't expect mortgage rates to drop close to 5% anytime soon. Here's what three industry professionals had to say:

Heather Long, chief economist at Navy Federal Credit Union, doesn't see rates hitting 5% in the near future. She explains that if the conflict in Iran ends, rates might fall back to around 6%. But as long as the conflict continues, inflation stays high, and government defense spending rises, borrowing costs will likely stay elevated.

Melissa Cohn, regional vice president of William Raveis Mortgage, agrees that the global political situation is a major factor. She says we can't set any real timeline for rate drops until the conflict in the Middle East is resolved.

JD Pisula, CEO of Accolade Advisory, points out that mortgage rates closely follow the 10-year Treasury yield. Treasury yields have risen recently due to stubborn inflation and global tensions. He believes it's hard to see 5% mortgage rates returning within the next couple of years unless there's a major global recession.

What Would It Take for Rates to Hit 5%?

Experts say several things would need to happen for mortgage rates to drop back to 5%:

• The conflict in Iran would need to end
• Oil prices would need to fall by more than 40%
• Inflation would need to settle below 2.5%
• The economy would need to slow down enough for bond yields to drop to around 3.50%

Heather Long adds that reaching 5% rates would likely require either a recession or a major boost in economic growth from new technologies like AI that also lowers inflation.

Should You Wait for Lower Rates?

If you're thinking about buying a home, waiting for 5% rates might not be the best strategy. As Melissa Cohn puts it, "It's always impossible to time the market." Instead, she suggests finding the right home at the right price and then shopping around for the best rate available.

One option to consider is an adjustable-rate mortgage (ARM). JD Pisula notes that since many homebuyers stay in their homes for less than 10 years, an ARM can offer a lower rate now with the option to refinance later if rates drop.

What This Means for Cash-Out Refinancing

If you're a current homeowner thinking about a cash-out refinance, these rate trends are important to understand.

A cash-out refinance lets you tap into your home's equity by taking out a new, larger mortgage and receiving the difference in cash. This money can be used for home improvements, paying off high-interest debt, or other major expenses.

However, with rates currently hovering near 6.5%, a cash-out refinance may cost more than it would have a few years ago when rates were lower. Here are some things to consider:

• Compare your current rate: If you already have a mortgage rate below 5% or 6%, a cash-out refinance at today's rates means you'll be paying more interest going forward.
• Weigh the benefits: If you need funds for something important—like consolidating high-interest credit card debt—the overall savings might still make sense even at higher rates.
• Consider waiting: If your need isn't urgent, you might benefit from waiting to see if rates drop. But keep in mind, there's no guarantee rates will fall.
• Shop around: Just like with a home purchase, rates for cash-out refinances vary by lender. Getting quotes from multiple lenders can help you find a better deal.

The Bottom Line

While mortgage rates might fall closer to 5% by 2026, many things would need to line up for that to happen. Rates could just as easily go up as they could go down.

For many homebuyers and homeowners, waiting for the "perfect" rate may end up costing more in the long run. Your best bet is to evaluate your personal situation, shop for the best rates available now, and keep an eye on the market for future refinancing opportunities.

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