Will mortgage rates drop now that the Fed's paused rates again?

The Federal Reserve is keeping its benchmark rate paused for now, which could impact where mortgage rates head next. Getty Images

As was widely expected, the Federal Reserve announced at the close of its May meeting that it is once again holding its benchmark rate steady. This is the central bank's third straight rate pause, signaling that the Fed is still walking a tightrope between curbing inflation and avoiding a recession. While markets had hoped for a rate cut, the Fed made it clear that more concrete progress on inflation is needed before any reductions happen. That said, there are still expectations that Fed rate cuts — likely two in total — could be on the table later this year if the data cooperates.

For prospective homebuyers and homeowners, this continued pause raises a familiar question: When will borrowing costs finally come down? Mortgage rates have remained stubbornly high for much of 2024 and early 2025, after all, despite inflation numbers cooling from their peak. Right now, the average 30-year fixed mortgage rate is hovering near 6.9% — well above the 3% range that many Americans grew accustomed to just a few years ago. And, home prices are also elevated compared to recent years, making it even tougher to afford a home purchase.

Given today's elevated homebuying costs, a mortgage rate decline would provide welcome relief for both potential homebuyers and sellers alike. But will the Fed's latest rate pause lead to one this May? That's what we'll explore below.

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Will mortgage rates drop now that the Fed's paused rates again?

It's important to understand that the Fed doesn't set mortgage rates directly. However, its policy decisions play a big role in shaping the broader interest rate environment. When the Fed raises or lowers the federal funds rate, it influences the cost of borrowing throughout the economy, impacting everything from credit cards to personal loans and, yes, mortgage rates.

As a result, the Fed's rate pause this May could create favorable conditions for mortgage rates to decline, especially if investors interpret the pause as a sign that rate cuts may be on the horizon later in 2025. Lower inflation readings and a cooling job market would further support that scenario.

However, mortgage rates don't move in lockstep with the Fed's decisions. They tend to follow the yield on the 10-year U.S. Treasury note instead, which is influenced by a wide range of factors, including:

Inflation trends: Mortgage rates generally fall when inflation slows. Recent data shows inflation is cooling, but not as quickly as the Fed would like.Economic growth: A weaker-than-expected GDP reading or signs of labor market softening could put downward pressure on rates. It's worth noting, though, that the most recent job data showed that employers added 177,000 jobs in April, surpassing analyst forecasts.Investor sentiment: When investors expect a recession or slower growth, demand for safe assets like Treasuries increases, pushing yields and mortgage rates lower.Global uncertainty: Geopolitical tensions or economic instability can also influence U.S. bond markets and, by extension, mortgage rates.

So, the short answer is that the Fed's rate pause is a step in the right direction if you're hoping for lower mortgage rates. However, it's only one part of a much bigger rate picture — and this latest rate pause is unlikely to have a direct impact on mortgage rates now.

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How to find the lowest mortgage rates now

Whether you're buying a home or considering a refinance, it's still possible to secure a competitive mortgage rate, especially if you're proactive and strategic about the process. Here are a few ways to increase your odds of locking in a low rate now:

Improve your credit score. Lenders reserve their best rates for borrowers with excellent credit. If your score is below 740, take the time to pay down debt, make on-time payments and check for errors on your credit report before applying.

Shop around and compare offers. Mortgage rates can vary widely between lenders, so you should get at least three to five quotes from different banks, credit unions and online lenders. Even a slight rate difference can save you thousands over the life of your loan.

Consider a rate buydown or points. Some lenders offer options to buy down your rate by paying points upfront. This can make sense if you plan to stay in your home over the long term and want lower monthly payments.

Explore loan types. Conventional 30-year fixed loans aren't the only option you have. You might find lower rates with a 15-year fixed loan or an adjustable-rate mortgage (ARM), though the latter comes with more risk if rates rise in the future.

Lock your rate strategically. If you're in the market right now, consider watching mortgage rate trends and locking in a rate when it dips. Some lenders even offer float-down options in case rates drop before you close.

The bottom line

The Fed's decision to hold rates steady again at its May meeting could pave the way for lower mortgage rates later this year, but it's far from guaranteed. While this pause sends a positive signal to the markets, mortgage rates respond to a broader mix of economic factors, many of which remain uncertain or volatile.

If you're hoping to take advantage of lower rates, your best bet is to stay informed, prepare financially and be ready to act quickly when an opportunity arises. Whether rates drop sharply or only inch down gradually, taking the right steps now can help you lock in the best possible deal when the timing is right.

Angelica Leicht

Angelica Leicht is the senior editor for the Managing Your Money section for CBSNews.com, where she writes and edits articles on a range of personal finance topics. Angelica previously held editing roles at The Simple Dollar, Interest, HousingWire and other financial publications.