Featuring the perspectives of:

Jeremy Collett
Chief Capital Markets Officer, Rate

Bill Dawley
Mortgage Division Manager, Amegy Bank

Jeremy Luke
Senior Lending Manager, Chase

What do you expect to happen with interest rates in 2025?

Jeremy Luke: Predicting how the market, and therefore rates, will react in the coming months is nearly impossible. However, with the recent rate cut from the Fed, we are seeing more optimism around mortgage rates and an uptick in home buying demand. There were some early indications that rates might fall further in the coming months. If we see any additional cuts, they are likely to be slow and gradual. This is a good sign that the economy is doing well, and a strong economy is great for housing recovery and stability.

Roughly 70% of mortgage debt is currently below a 5% interest rate. If rates continue to decline, we’ll likely see the lock-in effect soften, and consumers will be more willing to purchase a home and take on a higher rate than they currently have. While many factors influence mortgage rates, buyers will have more options than before if rates continue to drop.

Bill Dawley: I and most prognosticators believe we won’t see a significant drop in long-term interest rates until late in the second quarter. These downward-trend predictions suggest a more favorable environment for borrowers, which could stimulate economic activity and make homeownership more accessible, keeping in mind policy changes and economic fluctuations can always influence interest rate trends.

Jeremy Collett: Markets have been trading decisively risk-on since Trump’s election win, characterized by large rallies in equities and crypto currencies. The inflows to higher returning investments have left the bond market teetering and as a result interest rates have moved materially higher. The outlook for future Fed rate cuts has cooled and our base case suggests we’ll only see 50-75 bps of cuts next year — so rates should be “lower, but slower.” Thirty-year mortgage rates likely remain in the 6s throughout 2025.

What will be the biggest challenges and opportunities for lenders in 2025?

Collett: 2025 looks like it will be more of the same for mortgage originators, with focus remaining on cost control, incorporating tech to chop origination costs and building upon diverse product offerings to deal with the market challenges of sustained elevated interest rates. There is tremendous uncertainty around impacts of tariffs, deportation and GSE (government sponsored enterprise) reform to also cope with.

Dawley: As the financial landscape continues to evolve, we will likely see challenges including rising operational costs, delinquency rates and high debt levels. Opportunities will likely include a slight increase in mortgage originations. Because the 30-year interest rates today are near 7%, and 80% of homeowners have a current rate below 5%, we won’t see many refinance transactions. But because consumer credit card debt is at an all-time high, and home values have increased substantially over the last couple of years, we probably will see a boost with additional cash-out refinance opportunities. So, 2025 will likely be primarily a purchase market. Experts are predicting a slight improvement in loan applications in 2025 vs. 2024.

Luke: We expect to see continued demand for refinancing as rates drop. We’re already seeing volume pick up as a 50-basis point drop made sense financially for a lot of existing homeowners. If rates drop below 6%, roughly 4.7 million consumers would be eligible for a refinance opportunity, leading to increased activity in the refinance market. It’s critical for lenders to be able to keep up with the increased demand.

In Houston, home sales increased while home prices also increased. Inventory has also increased, which could alleviate some of the pressure on buyers, though high prices may still limit affordability for many.

Now is a great time for lenders to emphasize the resources and tools they offer to help homebuyers and homeowners educate themselves on the homebuying or refinancing processes. Lenders can offer resources to help make homeownership more affordable, like assistance programs. For example, Chase’s homebuyer grant offers up to $7,500 to eligible homebuyers in over 15,000 communities nationwide, and that can be used toward down payments and closing costs.

What will be the impact of AI on mortgage lending in 2025 and beyond?

Dawley: That is a great question. Throughout 2025 and beyond, I expect further technological advancements to take place surrounding AI. Leveraging AI and other technologies can streamline operations, enhance customer service and improve decision-making processes. AI will play a huge role in data analytics when it comes to evaluating risk, creditworthiness, property valuations, fraud detection, etc. It will also assist applicants when completing the loan application and providing required documents. AI’s increased integration into mortgage calculation software and underwriting systems will undoubtedly make the lending process more efficient while expanding credit access to more borrowers.

Luke: AI will have a huge impact on almost every aspect of mortgage lending. The mortgage industry today is incredibly paper-based — we do a lot of our work manually or in online documents.

Implementing AI will help to streamline tasks, and ultimately increase efficiency and consistency for lenders. We also expect AI to play a role in the underwriting process and the technology will support lenders in determining creditworthiness. AI will be leveraged more in 2025 to analyze market trends and enable lenders to offer resources that align with the current market.

There is a lot in store for AI in 2025, but we anticipate it will be another 3-5 years before we see sustainable impacts of the technology.

Collett: In 2025, I believe AI is most likely to impact areas like compliance and underwriting, with its ability to quickly call up massive amounts of guidelines and regulation data and insert them into the origination process. There is certainly room and demand to incorporate AI functionality involving OCR technology, which is currently used in the conforming world, into the NQM market.

Check out this year’s other predictions below!