When Will Mortgage Rates Drop Below 5%? Insights for 2025 and 2026

As of September 2025, 30-year fixed mortgage rates have hovered above 6% for much of the past few years, making the prospect of 5% rates feel like a distant goal for many prospective homebuyers. While recent Federal Reserve rate cuts have sparked some optimism, industry experts offer a mixed outlook for significant drops through 2025 and into 2026. A combination of sustained inflation control and potential economic shifts could pave the way, but don’t expect a rapid plunge without broader catalysts.

Expert Predictions on Mortgage Rates Reaching 5%

Forecasts vary widely depending on economic assumptions. Bank of America economists suggest a “path to a 5% mortgage rate” if the Fed successfully manages two key factors: further inflation cooling and avoiding a deep recession, though their baseline scenario keeps rates at around 6.25% by the end of both 2025 and 2026.  More optimistic views, such as those from Fannie Mae, project rates dipping to 6.2% by late 2025 and potentially as low as 4% in 2026 if conditions align favorably. 

However, not all analysts are bullish. Chris Whalen, a New York investment banker, predicts 5% as a realistic target in the next cycle, but Realtor.com’s chief economist Danielle Hale cautions that rates may only normalize to 5.5%-6% without major disruptions.  CBS News reports that if inflation data continues to favor borrowers and the Fed implements additional cuts, rates could end 2025 below 6%, setting the stage for further declines in 2026.  Overall, while some see sub-5% rates by 2026, most agree that 2025 will likely see gradual easing rather than a sharp drop to 5%. 

What Could Trigger Mortgage Rates to Hit 5%?

The primary driver remains the Federal Reserve’s benchmark rate, currently targeted at around 4.5%-4.75% following recent adjustments. Experts like Hale emphasize that time and progress toward the Fed’s 2% inflation goal are key, potentially normalizing long-term yields to 4% and pushing mortgage rates toward 5.5%.  However, Fed cuts don’t directly translate one-to-one; for instance, a 0.25% cut in September 2025 led to a slight uptick in 10-year Treasury yields, a common mortgage proxy. 

A faster path to 5% could emerge from an economic setback. “In a recession, we might see rates drop to 5.5% or even below,” Hale notes, as the Fed could accelerate cuts to stimulate growth.  Recent data shows the U.S. economy avoiding recession so far, with positive GDP but softening employment—factors that could tip the scales if they worsen.  If inflation continues to dissipate and the economy cools moderately, rates are poised to decrease further in 2025, per multiple forecasts. 

Impact on Homebuyers and Market Competition

Should rates fall to 5%, expect a surge in activity. Hale predicts this would draw both buyers and sellers back, potentially balancing the market rather than spiking competition intensely.  Lower rates could make homes more affordable, but in a recession scenario, benefits like reduced prices might be offset by job instability. Surveys indicate nearly 30% of potential buyers view a downturn as an opportunity for better deals. 

For those locked into low rates from prior years, moving might become more appealing with refinancing options, though experts advise weighing costs carefully.

How to Prepare for Potential 5% Mortgage Rates

Opportunities can arise quickly, so position yourself now:

1.  Build Your Savings: Secure a down payment (aim for 20% to avoid PMI) and cover closing costs, which average 2-5% of the loan.

2.  Boost Your Credit: Aim for a score above 740 for the best rates. Pay down debt and check reports for errors.

3.  Define Your Budget: Use online calculators to set a realistic price range and monthly payment, factoring in property taxes and insurance.

4.  Get Prequalified: Shop lenders for quotes—rates vary by 0.5% or more. This gives you leverage when rates dip.

Even if rates don’t hit 5% soon, buying now and refinancing later remains a viable strategy. 

FAQs: Mortgage Rates Dropping to 5%

Are mortgage rates expected to reach 5% in 2025?

Predictions are cautious; some see it possible with aggressive Fed cuts, but most forecast rates around 6% by year-end, with bigger drops in 2026. 

Could rates go below 5% again, like 4%?

Unlikely without extraordinary events, similar to post-2008 or pandemic lows. Current projections hover near 4% only in optimistic 2026 scenarios. 

When were 5% rates last common?

They prevailed from the 2008 recession through 2022, with brief dips in 2003-2004. 

Will Fed cuts guarantee 5% mortgage rates?

No—mortgage rates track Treasuries more closely, and cuts may not fully pass through without economic weakness. 

Should I wait for 5% rates to buy?

Don’t delay if you can afford now; refinance later if rates fall. Market timing is risky amid potential inventory shortages.