Last month, the Federal Reserve announced a 50-basis-point cut to the federal funds rate, with expectations of similar reductions throughout the year. (A basis point is one one-hundredth of one percent.) This move aligned with market expectations. Mortgage lenders have already adjusted mortgage interest rates accordingly: Since peaking over 7% in the spring, rates have dropped by more than a full percentage point. With lower mortgage interest rates now a reality, what does this mean for potential home buyers, refinancers, and sellers?
Buyers’ Wait Is Over
Typically, when rates fall, buyer demand increases, but this didn’t happen as rates dropped earlier this summer. It’s anticipated that this Federal Reserve announcement will bring more buyers into the market. Many may not realize that rate changes are often factored in before official announcements.
According to a recent NerdWallet survey, 15% of Americans plan to buy a house once rates decrease. If you’re in that 15%, now might be a good time to start your search.
At a press conference following the Federal Reserve’s announcement, the chair cautioned against expecting the ultra-low interest rates seen during the pandemic and the 2010s. While a significant drop in mortgage rates seems unlikely, there’s still potential for slight increases if rate cuts proceed more slowly than expected.
Even with lower rates, high home prices remain a challenge. In August, the median price of an existing home was $416,700, according to the National Association of Realtors. A 10% down payment and a 7% mortgage rate would result in a monthly principal and interest payment of about $2,500. At a 6% rate, the payment drops to $2,300 — a $200 monthly savings, but still a significant expense when property taxes, insurance, and other costs are considered.
Ultimately, the decision to buy will come down to individual circumstances. If you’re ready and find a home that fits your budget, it may be time to move forward.
More Homeowners Could Save with a Refinance
Homeowners who purchased at higher mortgage rates have been waiting for rate cuts, and some may now benefit from refinancing. With 30-year mortgage rates near 6%, approximately 4.7 million homeowners could lower their interest rates by at least 75 basis points, according to data from a real estate tech firm.
The standard refinancing calculation involves determining the cost of the refinance, usually 2% to 6% of the loan amount, and comparing that with the monthly savings from the new interest rate. Homeowners should consider how long it will take to break even and whether it aligns with their financial goals.
For some, lowering the interest rate may be enough incentive, even if the break-even point isn’t immediate. The decision depends on individual priorities, such as improving cash flow.
The Key to Rate Lock-In
Many homeowners, however, are locked into mortgage rates well below today’s rates. More than half of U.S. mortgage borrowers currently have rates below 4%, according to data from the Federal Housing Finance Agency (FHFA).
This gap creates a “lock-in” effect, where homeowners hesitate to sell because they don’t want to give up their low rates. For every percentage point that current rates exceed a homeowner’s mortgage rate, there’s an estimated 18% decrease in the likelihood they will sell, according to FHFA research.
Despite this, life events such as job changes or divorce may force sales, regardless of interest rates. As rates lower, factors like the desire for a new location or more space could motivate some to sell. Homeowners must weigh whether a higher monthly payment is worth the benefits of moving.
Ready to explore your options? Whether you’re considering buying, refinancing, or selling your property, I’m here to help. Reach out today for personalized guidance, additional resources, or a complimentary property evaluation. Let’s discuss how current market trends impact your real estate goals and how we can secure the best outcome for you.
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