What does the Recent Fed Rate Cut Mean for Mortgage Rates?

The Federal Reserve recently cut interest rates by 50 bps on September 18th, 2024, reducing the federal funds rate to a range of 4.75% to 5%. This marks the first cut since the pandemic and signals a strategic shift toward…

Written by Amresh Singh

Founder & CEO of HomeAbroad

Reviewed by Steven Glick

Director of Mortgage Sales | NMLS #1231769

The Impact of the Fed Rate Cut on Mortgage Rates

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Key Takeaways:

➡️ Rates May Fall Gradually: The Fed’s cut will likely lead to lower mortgage rates over time, but significant decreases may not occur immediately. The mortgage rates had already factored in the expected fed rate cuts to some extent. 

➡️ Don’t Wait Too Long: Rising home prices due to limited supply may outweigh the benefits of waiting for slightly lower interest rates as buyers who have been on the sidelines enter the market. 

➡️ Focus on Price, Not Just Rates: Locking in a good price now and refinancing later may be the best way to balance the current market dynamics.

How the Fed Rate Cut Affects Mortgage Rates?

While the Fed’s rate cut suggests a downward trend in borrowing costs, the direct impact on mortgage rates is not always immediate. Here’s how:

Current Mortgage Rates: As of September 19, 2024, the average 30-year fixed mortgage rate stands at 6.20%, according to Freddie Mac. This reflects a gradual decline from earlier highs in 2024 but remains above pre-pandemic levels.
Mortgage Rates Are Tied to Market Expectations: Mortgage lenders often anticipate future rate cuts and price them into their rates ahead of time. So, while the cut can signal lower rates, immediate changes may be subtle. Most forecasts believe that the 30-year fixed-rate mortgage will still be between 6%-6.5% by the fourth quarter of 2024.
Gradual Decline in Mortgage Rates: Over the next few months, mortgage rates may gradually decrease, benefiting first-time homebuyers and international investors. That said, it’s important to note that rates will likely remain higher than the record lows seen during the pandemic.

What does This Mean for Homebuyers?

For homebuyers, this Fed rate cut brings both opportunities and risks:

Lower Borrowing Costs: Buyers can benefit from lower monthly mortgage payments as rates trend down.
Time to Act: Waiting for rates to fall further may not always be the best strategy. As demand increases due to lower rates, housing prices could rise due to lower inventory, making homes less affordable despite lower mortgage costs.
Focus on the Purchase Price: It’s crucial to prioritize locking your rate in a favorable purchase price, as interest rates can be adjusted later through refinancing. The mantra “date the rate, marry the house” highlights this strategy.

A Balanced Approach for Real Estate Investors

While lower mortgage rates make financing more attractive, supply shortages and high demand still shape the housing market. In many states, demand remains strong, and home prices are likely to rise as more buyers enter the market following the recent rate cut.

This creates a timely opportunity for real estate investors to act quickly and secure properties while rates have just lowered. By doing so, they can capitalize on future property price appreciation, building home equity as increased buyer demand continues to drive market growth.

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FAQs

Does the Fed rate affect mortgage rates?

Yes, the Federal Reserve (Fed) rate does affect mortgage rates. When the Fed changes its rate, it influences banks’ overall borrowing costs, which can lead to adjustments in mortgage rates.

What is a Fed rate?

The Fed rate, or federal funds rate, is the interest rate at which banks lend money to each other, set by the Federal Reserve. It influences borrowing costs, consumer spending, and inflation, serving as a benchmark for various interest rates, including mortgages and credit cards.

Amresh Singh, Founder & CEO of HomeAbroad

About the author:

Amresh is the Founder & CEO of HomeAbroad. With over 14 years of mortgage industry experience, he specializes in foreign national mortgages and Non-QM mortgages. He is also a licensed mortgage originator (NMLS # 2549148).