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The U.S. Federal Reserve is set to cut interest rates for the first time in years this fall, which could send mortgage rates lower.
Even small cuts in interest rates can make a big difference in what homebuyers pay. Up until that point, people in the homebuying market had been eagerly awaiting the central bank to cut interest rates.
The Federal Reserve is scheduled to meet this week, but experts say it is likely to cut interest rates for the first time in September. It would be the first rate cut since 2020, when the Covid-19 pandemic began.
While there is a less than 6% chance of a rate cut at the next FOMC meeting, according to CME's FedWatch gauge of futures market pricing, there is a much higher chance of quarter-point rate cuts in September, November and December.
That, combined with further cuts in 2025, would bring the Fed’s benchmark federal 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 influenced in part by Federal Reserve policy. Home loan rates have already started to fall, in part because the Fed has reined in interest rate increases.
Here's what homeowners and buyers need to know.
Price cuts are already in the market.
The first rate cut has almost been fully priced into financial markets, especially bond markets, said Chen Zhao, head of economic research at online mortgage brokerage Redfin. In other words, mortgage rates won’t change much once the Fed actually starts cutting rates.
“A lot of these rate cuts have already been priced in,” she said.
The 30-year fixed mortgage rate fell to 6.78% on July 25, compared with 7.22% on May 2, according to Freddie Mac data via the Federal Reserve.
Refinance now or later?
“Refinancings are starting to pick up, it’s not a huge wave yet, but it’s starting to pick up a little bit as rates start to come down,” Zhao said.
Existing home loan refinancing activity rose 15% from the previous week, reaching its highest level since August 2022, according to the Mortgage Bankers Association. The activity was 37% higher than a year ago, the Mortgage Bankers Association found.
Whether homeowners need to refinance depends in part on their current interest rate, said Selma Heap, chief economist at CoreLogic.
“There are people who started buying when mortgage rates peaked at 8% in the fall of last year,” Heap says. “For those buyers, there are some opportunities.”
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Experts say homeowners need to see a significant drop in mortgage rates to take advantage of refinancing, in order to “win,” or when it makes sense to refinance. The prevailing rate must be at least 50 basis points below the current rate. A basis point is one-hundredth of a percentage point.
While this may be a good strategy, it's not a “hard and fast rule,” said Jacob Channell, chief economist at LendingTree.
Determining when to refinance your home depends on factors like your monthly mortgage payment and whether you can afford closing costs, he said: “There’s a lot of variance.” (When you refinance your mortgage, you’ll likely incur closing costs, plus an appraisal and title insurance; the total price will depend on your area.)
“The savings should exceed your initial costs,” Zhao explained.
Even if your current mortgage rate is high, you may want to consider waiting until the central bank continues its cuts, with rates expected to 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 is the best option for you, Channell said.
Buy now or later?
While lower interest rates may be a relief to cost-constrained homebuyers, the true effects of lower borrowing costs remain unclear, according to Zhao.
For example, if borrowing costs for home loans fall, more buyers could jump into the market. And if demand outstrips supply, prices could rise even more, she said. That could “offset the relief you get from mortgage rates.”
But exactly what will happen in the housing market “remains unclear” depending on how low mortgage rates are in the second half of the year and the level of supply, Channell said.
“Timing the market is basically impossible,” said Channell. “If you’re always waiting for perfect market conditions, you’ll be waiting forever. Only buy now if the idea sounds good to you.”
