By Don DeBat

Sep. 24, 2025 – Chicago home buyers could be handed a gift-wrapped present of a 5.75 percent 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 on September 17.

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

Fed officials, led by Chair 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 percent.

However, only one Fed rate reduction is forecast in 2026. (Left) Powell at a United States Senate hearing in 2023. Photo by Graeme Sloan (Sipa USA via AP Images).

Economists are forecasting a 3.6 percent federal funds rate by the end of 2025, 3.4 percent by the end of 2026, and 3.1 percent by the end of 2027. So, it is possible that home buyers could see 4 percent 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 September 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 percent on benchmark 30-year fixed loans, down from 6.35 percent a week earlier. A year ago, the 30-year fixed-rate mortgage average was 6.09 percent.

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

Based on a $400,000 loan and 20 percent down payment of $100,000, the borrower’s monthly principal and interest payment would be $2,334.29 at 5.75 percent. Today, at 6.26 percent, the monthly payment would be $2,465.47. That’s a monthly savings of $131.18, or $1,574.16 a year.

If 30-year mortgage rates fell to 5 percent – a traditional housing market “sweet spot” – the monthly payment on that $400,000 loan would decline to $2,147.29, a savings of $318.18 a month, 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 mortgage rate decrease is prompting many homeowners to refinance,” noted Sam Khater (right), Freddie Mac’s Chief Economist. “In fact, the share of mortgage applications that were refinanced reached nearly 60 percent, the highest since January 2022.”

The survey found that the 15-year fixed loan average declined to 5.41 percent, down from 5.50 percent a week earlier.

The Freddie Mac survey is focused on conventional, conforming, fully amortizing home purchase loans for borrowers who place a 20 percent down payment and have excellent credit.

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

However, from 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.