By Team Loandrone
A lot has already happened in the markets since the start of the new year. Mortgage rates moved lower, then reversed course, and overall direction has been anything but clear.
The most important takeaway right now is this: rate volatility is likely to continue. Where rates ultimately settle remains uncertain and will depend on several economic, policy, and global factors.
For context, mortgage rates generally traded in the 5%–6% range during much of 2025. Looking ahead to 2026, our base-case expectation is a range closer to 4%–5%, though that outlook is subject to change. Several developments could push rates outside that range or keep them elevated longer than anticipated.
Below are some of the most significant positive, negative, and neutral forces currently influencing mortgage rates.
Key Factors That Could Move Mortgage Rates
1. Mortgage Bond Buying by the Administration
(Potential Positive for Rates)
One of the most notable developments over the past year was the administration’s announcement related to increased mortgage bond purchases. This policy signal coincided with the sharpest mortgage rate decline since April of last year.
The proposal involves utilizing approximately $200 billion in surplus capital accumulated by Fannie Mae to facilitate mortgage-backed securities (MBS) purchases. Increased demand for MBS generally pushes yields lower, which can translate into lower mortgage rates.
Market estimates suggest that $200 billion in mortgage bond purchases could reduce mortgage rates by approximately 10–15 basis points, though actual outcomes will depend on timing, scale, and broader market conditions.
As implementation details emerge throughout the year, future announcements related to expanding, slowing, or tapering these purchases could move rates quickly in either direction.
2. Inflation: Cooling, But Not Fully Resolved
(Mixed Impact)
Inflation has moderated meaningfully from its peak, particularly in categories such as gas prices and housing and rent measures. These trends help relieve pressure on headline inflation and support the case for lower interest rates over time.
However, inflation remains uneven. Food prices and service-related costs have proven more persistent. Services inflation, in particular, edged higher to 3.3% in December 2025, up from 3.2% the prior month.
Overall inflation has slowed as evidenced by:
- CPI: Approximately 2.7% year-over-year (late 2025)
- Core CPI: 2.6% year-over-year (December 2025, BLS)
Core inflation remains above the Federal Reserve’s long-term target of 2%, which limits how aggressively policy can ease. From here, three realistic paths remain:
- Inflation continues to cool gradually
- Inflation re-accelerates modestly
- Inflation remains sticky near current levels
The third scenario is currently viewed by many market participants as the most likely—and it would argue for a slower decline in mortgage rates.
3. Tariffs: A Major Wildcard
(Potential Negative for Rates)
Trade policy remains one of the least predictable variables. Broad-based tariffs could lead to the following:
- Increase input costs for businesses
- Raise consumer prices
- Reignite inflation pressures
Markets are closely watching tariff developments because even modest changes could quickly alter inflation expectations and interest rate forecasts.
4. Geopolitical Uncertainty
(Neutral to Volatile Impact)
Ongoing geopolitical tensions—and the potential for new conflicts—add another layer of uncertainty. In periods of heightened risk, investors often move toward safe-haven assets, which can influence bond yields and mortgage rates in unpredictable ways.
Extended instability can also disrupt global supply chains, energy markets. Both of which can feed back into inflation and rate expectations. Dollar dominance could also come into question and this could further complicate matters.
5. Focus on the Next Federal Reserve Chair
(Expectation-Driven Impact)
Another closely watched development is who will lead the Federal Reserve after Jerome Powell’s term ends in May 2026. It was announced today that Kevin Warsh will be the new Fed Chair. Kevin Warsh previously served on the Federal Open Market Committee (FOMC) and has a strong background and experience in monetary policy. Markets are processing this information, and in the weeks and months ahead, investors will be watching closely to see how policy may shift under his leadership.
While the Fed does not directly set mortgage rates, it strongly influences them through the monetary policy decisions , forward guidance and institutional credibility on inflation
The Fed Chair is not the sole decision-maker—the Federal Open Market Committee (FOMC) votes on policy—but the Chair’s communication style and priorities shape market expectations, which directly impact long-term rates.
6. The Labor Market: Strong Demand, Selective Weakness
(Potential Positive for Rates)
The labor market currently shows a split dynamic – strong demand in healthcare and service sectors and job losses or stagnation in manufacturing
Many businesses appear to be in a “low hire, low fire” posture as they assess recent policy changes and economic uncertainty.
If labor conditions soften further, the Fed’s dual mandate—which includes maintaining maximum employment—could come under pressure. In that scenario, policymakers may be more inclined to ease monetary policy, which would be supportive of lower rates over time.
Bottom Line
Mortgage rates in 2026 will likely be shaped by policy decisions, inflation trends, labor market conditions, and global events—often moving markets before outcomes are fully known.
Volatility should be expected. Direction will become clearer as these variables resolve.
For borrowers, the key is not predicting the exact bottom, but understanding how market forces interact and working with professionals who can explain options clearly as conditions evolve.
This outlook reflects current market data and informed analysis. It is not a guarantee of future rates, and individual loan pricing will vary.