July Mortgage Outlook: A Rate Drop, or More of the Same?

Mortgage rates are likely to edge a little lower in July, continuing the gradual decline we saw in June.

So far, inflation hasn’t risen from higher tariffs, and financial markets seem convinced that the Federal Reserve will cut short-term interest rates in the second half of the year. Together, those two factors could decrease mortgage rates or keep them more or less unchanged.

When will inflation show up?

Prices didn’t jump higher in April or May, even though tariff hikes were announced April 2. It’s possible that inflation hasn’t risen yet because wholesalers and retailers filled their warehouses before April in anticipation of the higher taxes. Businesses will run out of those stockpiled items someday. When recently imported items hit the store shelves, the prices are likely to rise because of tariffs.

Experts believe we will see a tariff-driven bump in inflation soon. Confirmation could come July 15. That’s when the consumer price index for June is released.

The Fed, inflation and interest rates

Let’s say we see inflation rising. How long will it last? That’s the question that puzzles the monetary policymakers at the Federal Reserve.

“The effects on inflation could be short lived, reflecting a one-time shift in the price level,” the Fed’s chair, Jerome Powell, said June 24 in prepared testimony before Congress. “It is also possible that the inflationary effects could instead be more persistent.”

It matters whether inflation will take one step upward and stop, or keep climbing. The answer will affect mortgage rates. Powell told Congress that he’s inclined to “wait to learn more about the likely course of the economy” before deciding when to cut short-term interest rates.

The Fed’s monetary policy committee meets July 29-30, and Powell was hinting that he leans toward keeping the federal funds rate where it is, and possibly cutting it at the Sept. 16-17 meeting.

But not everyone at the Fed agrees. Fed Governor Michelle Bowman said in a speech on June 23 that the Fed should seriously consider cutting the federal funds rate in July if “inflation pressures remain contained.”

Disagreement over the timing of the next Fed rate cut will spill into the news all month. If markets become convinced that a rate cut will happen in July, mortgage rates could fall. As of late June, though, most believed a September cut was more likely. If that perception continues, then mortgage rates might fall, but more slowly.

What other forecasters predict

The Mortgage Bankers Association predicts that mortgage rates won’t change much over the next three months. The trade association forecasts that the 30-year mortgage will average 6.8% from July through September, about the same as the average from April through June.

Mortgage securitizer Fannie Mae expects mortgage rates to drop in the third quarter, averaging 6.6%.

Both organizations predict mortgage rates to decline gradually through the first half of 2026.

What I predicted for June, and what happened

At the end of May, I wrote: “Mortgage rates may keep climbing in June, continuing an unsteady upward march that began after higher tariffs were announced in April.” That … didn’t happen.

Instead, mortgage rates inched a little lower in June. It wasn’t much of a decline, but rates did fall gradually.

Thank the drop in rates to something that didn’t happen: Inflation didn’t pop up like a seemingly dead monster in a horror movie. The core consumer price index rose 2.8% year-over-year in May, the Bureau of Labor Statistics reported June 11. It was the same inflation reading as in April, and an indication that tariffs had not yet pushed overall prices higher.

The article July Mortgage Outlook: A Rate Drop, or More of the Same? originally appeared on NerdWallet.