Home buyers could see 5.75% mortgage rates by Christmas

Chicago home buyers could be handed a gift-wrapped present of a 5.75% mortgage rate for Christmas.

That’s the crystal-ball gazing prediction from economists after the quarter-point interest rate reduction was voted by the Federal Reserve Board (Fed) on Sept. 17.

The move, which lowered the Fed’s short-term cost of funds rate to about 4.1% from 4.6%, is the first interest cut since Dec. 2024. After the Fed’s action, the federal funds rate now sits at a range of 4% to 4.5%, the lowest since Nov. 2022.

Fed officials, led by Chairman Jerome Powell, signaled they expect to reduce key rates twice more this year through two quarter-point reductions by year-end, dropping the federal-funds rate to a range of 3.5% to 3.75%. However, only one Fed rate reduction is forecast in 2026.

Economists are forecasting a 3.6% federal-funds rate by the end of 2025, 3.4% by the end of 2026, and 3.1% by the end of 2027. So, it is possible that home buyers could see 4% mortgage rates again in the next two years.

Analysts said lower interest rates will likely reduce borrowing costs for home mortgages, auto loans, credit-card interest and business loans and boost growth and hiring in the nation’s currently soft labor market.

On Sept. 18, a day after the Fed’s rate cut, Freddie Mac’s Primary Mortgage Market Survey reported that lenders nationwide were quoting an average of 6.26% on benchmark 30-year fixed loans, down from 6.35% a week earlier. A year ago, the 30-year fixed-rate mortgage average was 6.09%.

If mortgage rates drop by year’s end to about 5.75% from the current 6.26%, the buyer of a $500,000 home in Chicago could save dollars.

Based on a $400,000 loan and 20% down payment of $100,000, the borrower’s monthly principal and interest payment would be $2,334.29 at 5.75%. Today, at 6.26% the monthly payment would be $2,465.47. That’s a monthly savings of $131.18, or nearly $1,600 a year.

If 30-year mortgage rates fell to 5% traditional housing market ‘‘sweet spot,” the month- ly payment on that $400,000 loan would decline to $2,147.29, a monthly savings of $318.18, or $3,816.54 per year.

Of course, property taxes, insurance, utilities and maintenance would have to be added to the monthly ‘‘nut”’ for the complete cost of homeownership.

‘‘The mortgagerate decrease is prompting many homeowners to refinance,”’ noted Sam Khater, Freddie Mac’s chief economist. ‘‘In fact, the share of mortgage applications that were refinances reached nearly 60%, the highest since January 2022.”’ The survey found that the 15-year fixed loan average declined to 5.41%. down from 5.50% a week earlier.

The Freddie Mac survey is focused on conventional, con- forming, fully amortizing homepurchase loans for borrowers who place a 20% down payment and have excellent credit.

The Fed’s dream of reducing the nation’s inflation rate to 2% never materialized because the labor market slowed. Inflation rose to 2.9% in July. The nation added 911,000 jobs in 2024 and the first few months of 2025.

However, between June through August this year, only 29,000 workers were hired. Analysts say President Donald Trump’s international push to collect hefty tariffs likely torpedoed U.S. job formations. Time will tell. Mortgage-rate history Thirty-year fixed-mortgage interest rates have been on a roller-coaster ride the past few years. They ended 2020 at a rockbottom 2.65% the lowest level in the Freddie Mac survey history, which began in 1971. Homeloan rates set new record lows an amazing 16 times in 2020, and tens of thousands of homeowners refinanced.

Archives of the Federal Housing Finance Board show longterm mortgage rates in the 1960s were not much higher than the Great Depression, when lenders were charging 5% on five-year balloon loans. Six decades ago, between 1963 and 1965, borrowers could obtain a mortgage at 5.81% to 5.94%. Between 1971 and 1977, the now-defunct Illinois Usury Law held rates in the 7.6%to-9% range.

In the early 1980s, runaway inflation caused home-loan rates to skyrocket into the stratosphere. According to Freddie Mac, benchmark 30-year mortgage rates peaked at a jaw-dropping 18.45% in October of 1981. Rates finally fell below 10% in April of 1986, and then bounced in the 9%-to10% range during the balance of the 1980s.

Twenty-five years ago in August 2000 - when some of today’s Millennial borrowers were still in diapers, lenders were quoting 8.04%.

Between 2002 and 2011. rates floated in the 4%-to-6% range. They inched down into the 3%to-4% range until 2020, when they plummeted into the rockbottom 2% bracket.

Rates hit 5% again in April 2022, then skyrocketed to 7.08% in Oct. 2022. They peaked at 7.79% in Oct. 2023, as the U.S, inflation rate grew to levels not seen since the late 1970s and early 1980s. Since then, rates have bounced in the low-7% and midto-upper 6% bracket.

For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit