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The Federal Reserve is poised to make its first interest rate cut in years this fall, which could affect the decline in mortgage rates.
Even small cuts in interest rates could make a big difference in what a homebuyer will pay. At that point, people in the market to buy a home were eagerly waiting for the central bank to cut interest rates.
The Fed meets this week, but experts say it looks more likely that the first rate cut will come in September. This would be the first rate cut since 2020 at the start of the Covid-19 pandemic.
While there is less than a 6% chance of a rate cut at the upcoming Federal Open Market Committee meeting, according to CME’s FedWatch measure of futures market pricing, there is a much higher chance of quarterly declines in September, November and December.
That along with further cuts in 2025 would bring the Fed’s key Fed Funds rate below 4% by the end of next year, according to some experts.
While mortgage rates are fixed and mostly tied to Treasury yields and the economy, they are partly influenced by Fed policy. Mortgage rates have already started to decline, in part because the Fed has put the brakes on rate hikes.
Here’s what owners and buyers need to know.
Interest rate cuts have already been priced into the market
The first rate cut is almost entirely priced into financial markets, especially bond markets, said Chen Zhao, head of economic research at Redfin, an online real estate brokerage. In other words, mortgage rates aren’t going to change much once the Fed actually starts tapering, he said.
“A lot of these rate cuts have already been priced in,” he said.
The 30-year fixed-rate mortgage fell to 6.78 percent on July 25, from 7.22 percent on May 2, according to data from Freddie Mac via the Fed.
Refinance now or later?
“Refinancing is starting to pick up, it’s not a huge wave yet, but it’s starting to pick up a little bit as interest rates start to come down,” Zhao said.
Existing mortgage refinancing activity rose 15% from the previous week to the highest level since August 2022; according to the Mortgage Bankers Association. That was 37% higher than a year ago, according to MBA.
Whether homeowners should refinance depends in part on their existing interest rate, said Selma Hepp, chief economist at CoreLogic.
“There are people who came out when mortgages peaked at 8 percent in the fall of last year,” Hepp said. For those buyers, “there’s some opportunity there.”
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To be “in the money,” or when refinancing makes sense, homeowners need to see a significant drop in mortgage rates in order to take advantage, experts say. The prevailing rate should be at least 50 basis points below the current rate. A base unit is one hundredth of a percentage unit.
While that can be a good strategy, it’s not a “hard and fast rule,” said Jacob Channel, senior economist at LendingTree.
The timing of your home refinance will depend on factors such as your monthly mortgage payment and whether you can afford the closing costs, he said: “There’s a lot of variability.” (When you refinance a mortgage, you’re likely to incur closing costs, as well as an appraisal and title insurance, and the total price will depend on your area.)
“The savings should outweigh your initial costs,” Zhao explained.
Even if your existing mortgage has a high interest rate, you may want to consider waiting until the central bank takes its cuts further, with the expectation that rates will fall steadily throughout the year and into 2025 , Zhao said.
If you’re considering it, reach out to lenders and see if refinancing now or in the near future makes sense for you, Channel said.
Buy now or later?
While lower interest rates may come as a relief to cost-strapped homebuyers, the true effects of lower borrowing costs are still up in the air, according to Zhao.
For example: If the cost of borrowing for mortgages goes down, there is a chance that more buyers will jump into the market. And if demand outstrips supply, prices could rise even more, he said. It can ‘offset the relief you get from mortgage rates’.
But exactly what will happen in the housing market “is up in the air” depending on how much mortgage rates fall in the second half of the year and the level of supply, Channel said.
“Market timing is basically impossible,” Channel said. “If you’re always waiting for the perfect market conditions, you’ll be waiting forever. Buy now only if it’s a good idea for you.”
