Falling Mortgage Rates Signal Rising Recession Fears

Written by Dream Home Mortgage » Updated on: June 17th, 2025

In recent weeks, mortgage rates have been all over the place, and it’s getting hard to figure out what’s coming next. They are never easy to predict in the first place, but since the new administration took executive control, it has become even harder. You can blame it on several different decisions, such as tariff changes, wider trade war, DOGE-led government layoffs, or the uncertainty of it all. Just last week, FHA announced that it would no longer allow non-permanent residents presiding in the US the right to apply for mortgages.

With such drastic changes happening overnight, you just don’t know what new news you will wake up to! However, there is a silver lining for those who are looking to refinance, as rates have gone down from 7.25% to 6.25%. The question still remains: “Is this the best time to refinance?” To clear your queries and answer your burning questions, we have taken a deep dive into this matter to highlight the main points.

What’s Going on with the Mortgage Rates?

Whether you are a first-time homebuyer or looing to refinance, you need to understand mortgage rates. In simple words, mortgage interest rate is a percentage charged by the lender as part of a fee for borrowing the money for a home loan. Mortgage rates can be fixed and variable that tends to fluctuate. As a homebuyer or refinancer, you need to keep an eye on trends regarding mortgage rates and 10-year Treasury bond yield.

As of now, mortgage rates are dropping, but that is not a ‘good’ thing, given the current economic situation. When the US economy is strong, interest rates tend to rise as inflation is a concern. However, when the economy takes a plunge due to higher unemployment and lower consumer spending, investors get cold feet. They shift their money from stocks into safer assets such as US Treasury Bonds. This causes bond yields to fall, and since mortgage rates directly follow the direction of these yields, they also tend to drop.

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Bad News Means Good News When It Comes to Mortgage!

Now, this might sound strange to you, but in the mortgage world, bad economic news can be good for rates. Factors such as slower job growth, weaker retail sales, or talks of a possible recession on the horizon can push interest rates down. Why? To understand this, we have to look at how the Federal Reserve works. The Federal Reserve aims to encourage homebuyers like yourself to borrow and invest in the economy. That’s why we have seen moments where weak economic reports have led to mortgage rate dips. This makes it easier for homeowners and buyers to get more affordable loans at lower interest rates.

Perfect Time to Refinance or Buy as Mortgage Rate Continue to Drop

When it comes to the interest rate policy, Federal Reserve tends to play a central role in managing both inflation control and economic support. When inflation spikes, mortgage rates go up and vice versa. Therefore, if you are planning on buying a house or looking to refinance, it is the perfect time to do so! Here’s a quick breakdown of what might happen:

High Inflation Leads to Rate Hikes: Federal Reserve will raise interest rates when prices rise too fast by encouraging spending and borrowing.
Weak Economy is Equal to Rate Cuts: Due to layoffs and more unemployment, customer confidence tends to drop. Therefore, Fed will consider cutting the rates to help avoid recession.
Trying the “Soft Landing” Approach: Jerome Powell, US. Federal Reserve Chair, wants to take smaller and calculated steps to lower the onset of a hard recession in this time of elevated uncertainty.