In late September 2024, the Federal Reserve made a much-anticipated announcement that they were cutting the Federal Funds Rate by half a percentage point—indicating a silent, yet profound, victory over inflation. The Federal Funds Rate is the rate banks use to charge for overnight lending. It’s the shortest lending window and generally sets the cost of borrowing for other short term loans (bonds, CDs, business financing, credit cards, etc.).

But for many, the spotlight has been (and will likely remain) on mortgage rates. Will they go up? Down? Stay the same? Is a sub-3% rate ever coming back? Let’s take a look at how the Fed’s recent rate cut, and future rate cuts, will likely impact mortgage rates in the future.

First, What Can We Expect From Mortgage Rates in the Future?

No one can predict with 100% certainty what the Federal Reserve will do in the coming months. While it’s unlikely they’ll begin raising rates again (as this was only done in an effort to curb inflation, which we have), it’s possible they could either continue dropping steadily or remain as-is for the foreseeable future. 

In terms of how the Federal Funds Rate—this is what people refer to when talking about the Federal Reserve raising or cutting rates—impacts mortgage rates, it may not be as direct a correlation as most people assume.

With the stock market, stock prices fluctuate throughout the day, and they can turn on a dime at breaking news—a corporate scandal, natural disaster, pandemic lockdowns, etc., mortgage rates aren’t so easily influenced- meaning they won’t (typically) change overnight in accordance with the Fed’s decision. 

Rather, mortgage rates tend to move in anticipation of what’s coming—as is the case with September’s rate cut. Prior to the official announcement, mortgage rates had already started to trend down because for months, economists and lenders predicted a rate drop was coming. Why? Because they’re based on what’s expected to happen in the future, not what’s going on right now.

“There’s a lot of confusion around refinancing because people think the Federal Reserve’s rate cuts directly affect long-term mortgage rates, but that’s not always the case,” explained Erica Quistgard of Cross Country Mortgage. “After a Fed rate cut, mortgage rates may stay flat or even rise a bit before they start to fall.” 

That being said, if the expectation remains that the Federal Reserve will continue dropping rates, it’s logical to assume mortgage rates may eventually lower in anticipation of these upcoming decisions. Though, of course, this is still considered speculation, as we can’t predict the future more accurately than anyone else.

I do think it’s worth reiterating that while watching rates jump from 2.5% to 7.5%+ in a matter of months was jarring for many hopeful homebuyers, today’s rates are much more in line with the historical average than what we’ve seen in the decade prior. Not to mention, they’re still a far cry from historical highs—18.63% in October 1981 (really, the entire 1980s was an expensive decade to take on debt).1  

While it’s continually fluctuating, the 30-year fixed mortgage rate in early October 2024 stands around 6.375%, below the historical average of 7.37% (which accounts for 30-year fixed rates since 1971).2 

For Those Refinancing…

The reason they say “marry the house, date the rate” is because you always have the option to refinance your mortgage later on. However, this option is only really viable if rates go down. More specifically, if they go down within a reasonable amount of time, and they drop by enough percentage points to make it worth the cost to refinance.

Refinancing isn’t cheap. You should expect to spend between 4% and 6% of the new loan amount on closing costs (application fees, origination fees, appraisal fees, etc.).3 

With that being said, be strategic about when (and if) you choose to refinance. If you believe rates will continue dropping, it may be worth waiting—though, of course, this can be a bit of a gamble. Aside from potential rate drops, it’s also important to consider how much you have left on your original mortgage and if it’s worth the closing costs to refinance for a lesser rate.

“Rates are currently lower, but whether it makes sense to refinance depends on when the loan was originally taken out and how much is left on it,” says Quistguard.

For Those Selling…

If you’re selling your home, it’s important to focus more on your personal financial goals, needs, and reasons for selling.

“As for selling property, that depends on personal goals—where do they want to buy next? Are they prepared for higher property taxes? These are important considerations,” Quistguard reminds us.

If you have the luxury of waiting and being strategic with your home sale, it may be worth assessing current market conditions and looking at what experts are speculating about the future (the optimal word there, again, being “speculating”).

If you do end up delaying the sale of your home, keep in mind the additional costs you may be carrying for doing so—your mortgage, utilities, upkeep, etc. This also applies to investment properties, as those additional costs can impact your total profit.

For Those Buying…

The housing market is incredibly localized, meaning what’s happening in your neck of the woods may be different than what we’re seeing in other parts of the country. Analyze your local supply and demand, and try to focus on how homebuying will impact your own financial picture (as opposed to paying too much attention to changing rates). 

Interest rates play an important role in determining your monthly payments, but they aren’t the only factor. Your monthly rate will also depend on your down payment, loan amount, real estate taxes, homeowners insurance premiums, and more. Figure out what you’re comfortable paying each month, and work backward to determine how much house you can reasonably afford. A lending professional can help you do these calculations.

Mortgage Rates May Be Changing, Are You Prepared?

Coming out the other side of a challenging few years, seeing rates go back down is certainly a welcome change. Keep an eye out for future announcements from the Federal Reserve, since it’s possible we’ll continue getting rate cuts in the near future. 

At the end of the day, home buying, selling, and refinancing are all important financial decisions that should be discussed with both your financial advisor and real estate professional. If you’d like to discuss anything mentioned above in further detail, we’re happy to chat!

Sources:

1Historical Mortgage Rates: 1971 To The Present

2Historical Mortgage Rates: See Averages and Trends by Decade

3How much does it cost to refinance a mortgage?

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