The Federal Reserve is currently in the process of considering a rate cut in the coming months, a move that has the potential to impact mortgage rates significantly. With the possibility of even small reductions in rates, there could be a notable difference in what homebuyers end up paying. Many individuals looking to purchase a home have been eagerly awaiting the central bank’s decision to reduce rates. While the Fed is set to meet this week, experts are indicating that the initial rate cut is more likely to occur in September. This would mark the first rate cut since 2020, which took place at the beginning of the Covid-19 pandemic.
According to the CME’s FedWatch measure of futures market pricing, there is currently less than a 6% chance of a rate cut in the upcoming Federal Open Market Committee meeting. However, there is a higher likelihood of quarter-point reductions occurring in September, November, and December. Further rate cuts in 2025 could potentially drive the Fed’s benchmark fed funds rate to below 4% by the end of the following year, as suggested by some experts. While mortgage rates are generally fixed and linked to Treasury yields and economic conditions, they are also partially influenced by the Fed’s policy decisions. Some experts have noted that home loan rates have already begun to decrease, partly as a result of a slowdown implemented by the Fed.
Chen Zhao, the lead of economic research at Redfin, has mentioned that the initial rate cut is already largely factored into financial markets, particularly bond markets. She suggested that mortgage rates may not experience significant changes once the Fed officially starts its rate reduction. Refinance activity for existing home loans has seen a 15% increase from the previous week, reaching the highest level since August 2022. This represents a 37% surge compared to a year ago, as reported by the Mortgage Bankers Association.
Chief economist at CoreLogic, Selma Hepp, advises that homeowners’ decisions to refinance should take into account their existing rates. She pointed out that those who secured mortgages when rates peaked at 8% could potentially benefit from refinancing. In order for refinancing to be worthwhile, experts recommend seeing a substantial drop in mortgage rates, ideally at least 50 basis points below your current rate. While this can be a viable strategy, it is not a strict rule, as noted by Jacob Channel, a senior economist at LendingTree.
The decision to refinance should be assessed based on factors such as monthly mortgage payments and the ability to cover closing costs. Zhao emphasized that the long-term savings from refinancing should outweigh the upfront costs involved. While it may be tempting to wait for further rate reductions, Zhao suggested reaching out to lenders to explore the most suitable refinancing options. Channel reiterated that market timing is challenging and waiting for perfect conditions may not be practical.
Lower mortgage rates can provide relief for budget-constrained homebuyers, yet the full impact of reduced borrowing costs remains uncertain. Zhao highlighted that if borrowing costs decline, there is a risk of increased demand surpassing supply, potentially driving prices higher. This could offset the benefits of lower mortgage rates. Channel further emphasized the unpredictability of market timing, stating that waiting indefinitely for ideal conditions is unrealistic.
The impending rate cut by the Federal Reserve has the potential to significantly impact mortgage rates. Homeowners and potential buyers should carefully evaluate their options and seek advice from experts before making decisions related to refinancing. While lower rates can be advantageous, it is essential to consider the broader market dynamics and uncertainties in the housing sector.