Dear Olivia,
I’ve wanted to buy a home for a couple of years, but by the time I was ready, the rock-bottom interest rates so many of my friends and family enjoyed were long gone. Now that the Federal Reserve has cut interest rates, will that make mortgages more affordable again?
Sincerely,
Wants to Buy (at a Lower Rate)
This is SUCH a great question! So many people have wondered when interest rates would start moving down again, and now that a Fed cut is here, the burning question is, “how will this affect mortgage rates?”
The short answer is this: a rate cut by the Federal Reserve means mortgage interest rates will decrease. The long answer is a little more complicated…
Recent Federal Reserve Rates
Over the course of 2022-2023, the Federal Reserve consistently raised its federal fund rate to try to get inflation under control. And while those rate increases served their purpose – inflation has been steadily decreasing for months – the other effect is that it made mortgages and other loans more expensive.
Now, the Federal Reserve does not dictate mortgage rates. Instead, its changes to the federal fund rate determine how much interest banks pay one another to borrow funds from their reserves. So, when the Fed raised its rate, those short-term interest rates increased, too, and that meant banks charged higher interest rates for car loans, home equity lines of credit, and so forth.
The effect on mortgage rates is less direct. Fixed-rate mortgages track the 10-year Treasury yield, not the federal funds rate. So, when the 10-year Treasury yield goes up or down, fixed-rate mortgages go up and down with it. Usually, there’s a gap between the two of about 1.5-2 percentage points, but for much of this year and last year, that gap was closer to 3 percent, which is one of the reasons why mortgage interest rates as of late have been much higher than in the recent past.
The Federal Reserve’s Rate Cut is Good News for Home Loans
Even though the Fed’s rates aren’t directly involved in setting mortgage interest rates, its decision to cut the current rate by .5 percent does impact the broader scope of borrowing costs. The powers that be who set fixed mortgage rates pay attention to what the Fed does and take the Fed’s rate movements into account when setting mortgage rates. Factors like the 10-year Treasury yield, supply and demand of homes, and inflation are also factors that influence mortgage rates.
But here’s the power of the Fed’s decision-making: mortgage rates started to decline even before they announced the .5 percent rate cut in mid-September. In other words, rates dipped simply based on the widely-held assumption that the Fed would cut the federal funds rate. As of this writing on September 19th, 2024, NPR reports that the average mortgage rate for a 30-year fixed loan is 6.2 percent, which is the lowest we’ve seen since February 2023.
Will Mortgage Rates Continue to Drop?
The word on the street is that the Federal Reserve intends to drop its rates more in the coming months, which likely means mortgage rates will keep falling. However, it’s widely assumed that we’re probably at the lowest rates we’ll see this year – experts don’t expect mortgage rates to dip below 6 percent.
The good news is that all signs point to rates falling to the 5.5 percent mark by the end of next year. While 5.5 percent is still much higher than the sub-3 percent rates we saw in 2020-2021, I imagine a lot of folks would be willing to take out a mortgage at 5.5 percent over the 7.79 percent average rate we had in October 2023.
Ultimately, us regular folks have no control over what the Fed does or any other policymakers that affect mortgage rates. What you are in control of, though, are personal factors that impact the rates you qualify for – things like your credit score, debt-to-income ratio, and the amount of down payment you have. If you can take care of those things, you’ll likely get the best available rate – and that can be a big money-saver no matter what the average mortgage rates currently are!
As always, if you have other questions or concerns about real estate, don’t hesitate to reach out to me at 307-856-3999!
~Olivia