Amid expectations that the Federal Reserve will cut benchmark interest rates in the coming months, analysts at investment banking company Jefferies anticipate that mortgage rates could reach 6.5% at the end of 2024 and 5.75% in 2025, unlocking $2.7 trillion in refinancing opportunities.

“Recent economic data supports a path toward rate cuts and, therefore, a refinance rally,” Jefferies analysts Derek Sommers and John Hecht wrote in a report released Thursday. “We estimate a ‘near-the-money’ pipeline of approximately $2.7 trillion to be refinanced if rate cuts materialize.”

Soft inflation prints have made the environment more favorable for rate cuts. The Consumer Price Index (CPI) rose 3% annually in June, the third month in a row that inflation has fallen.

In addition, Fed Chair Jerome Powell recently stated that policymakers would not wait for inflation to reach 2% before cutting benchmark rates, which are currently ranging from 5.25% to 5.5%.

As a result, monetary policy watchers believe there is a 95.3% chance of rates staying unchanged in July, along with a 98.1% chance of a rate cut in September, according to the CME Group‘s FedWatch Tool. 

According to Jefferies analysts, the Fed’s moves will bring mortgage rates to 6.5% at the end of this year and 5.75% in 2025. At HousingWire’s Mortgage Rates Center, the 30-year rate for conventional loans averaged 7.01% on Thursday morning. 

The analysts said mortgage rates of 6.5% will be enough for refinance volume to increase during the fourth quarter of 2024 and the first quarter of 2025. That’s because lenders produced the $2.7 trillion in originations from Q4 2022 to Q2 2024 at averages rates of 6.25% to 7.75%. 

Therefore, a “meaningful amount” will be eligible for a rate-and-term refinance when 30-year mortgage rates revert to the range of 6% to 6.5%, the analysts concluded.

The analysis incorporates principal amortization and a prepayment assumption in projecting outstanding vintage balances.