On September 18, 2024, the Federal Reserve lowered the target range for the federal funds rate by a half of a percentage point.
It was the first rate cut since 2020, and the Federal Open Market Committee (FOMC) said they anticipate cutting rates another half of a percentage point by the end of 2024.
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Rate cuts reduce borrowing costs for mortgages, credit cards and car loans, making it more affordable to take out or refinance loans.
In this article, we’ll explore what the recent rate cut means for homeowners and homebuyers and how you can harness the benefits.
Why did the Federal Reserve cut rates?
The Federal Reserve, often referred to as “the Fed,” is the central bank of the United States.
The Fed’s primary role is to support the economy while controlling inflation.
It accomplishes this largely by adjusting interest rates, thus promoting maximum employment.
Inflation is improving but remains elevated
Let’s take a look at the timeline of events leading up to the Fed’s current decision regarding rate cuts:
- In 2020, the Fed had to swiftly take action by implementing a series of rate cuts to support the economy following the coronavirus pandemic.
- By 2022, inflation was becoming a major issue, and the Committee had to begin increasing rates in an effort to tame it.
- Today, inflation is edging closer to the desired 2% range, but slowing job growth and slightly rising unemployment pose a risk to future economic performance. As a result, the Fed has maintained reduced rates to reach the desired balance.
Currently, the Fed aims to support economic growth with reduced rates but without letting inflation get out of control.
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What is the immediate impact on mortgage interest rates?
The federal funds rate is essentially the interest rate at which banks lend to each other overnight.
While the Fed is not directly setting mortgage interest rates, its decision to lower the funds rate has a ripple effect across the economy.
A cut in the funds rate tends to lower consumer borrowing costs, including mortgages.
Mortgage interest rates are ahead of the game
Borrowers may have recently noticed that mortgage interest rates fell before the Fed lowered the funds rate and then raised slightly after the decision.
This is because mortgage interest rates move in anticipation of the Committee’s decisions rather than in response.
Mortgage interest rates more closely track 10-year Treasury bond yields, and after the Fed’s announcement, 10-year yields increased slightly.
What’s next for mortgage interest rates and the housing market?
If the Federal Reserve decides to continue with reduced rates and possibly more rate cuts, borrowers may be able to expect additional mortgage interest rate reductions.
Experts say that while mortgage interest rate moves can be unpredictable, rates are likely to continue gradually declining through the rest of the year and into 2025.
Declining rates have already stimulated more refinance and buyer activity as those waiting for a break in high rates begin to take action.
Rate cut benefits for homeowners and homebuyers
As of late September 2024, rates were at an average of 6.08%—the lowest level we have seen in two years.
Let’s look at the benefits of lower rates for homeowners and homebuyers.
Benefits for homeowners
- Refinancing opportunities: Existing homeowners can refinance their mortgages at a lower interest rate to attain lower monthly payments.
- Adjustable-rate mortgages (ARMs): ARM rates adjust periodically based on market conditions. At their next adjustment, homeowners with ARMs may be able to access a lower rate.
- Increase home equity: Less interest means more of your monthly payment goes toward your principal, allowing you to grow your equity faster.
Benefits for homebuyers
- Lower monthly payments: Homebuyers entering the market benefit the most from the rate cut because they can access lower monthly payments and reduce borrowing costs.
- Easier to qualify for a mortgage: Lower monthly payments mean borrowers may qualify for a larger loan amount without significantly increasing their monthly payments.
Lower rates allow more buyers to enter the market and find the home of their dreams.
However, keep in mind that buyer competition will increase with lower rates.
Compass Mortgage’s Get Committed® program helps borrowers stand out in a crowded market, lock in their rate and prove to sellers that they are serious buyers.
Should you refinance your current mortgage?
Are you considering refinancing to benefit from a lower interest rate?
To help you determine whether refinancing is right for you at current rates, ask yourself the following questions.
How much could I save by refinancing?
First, consider how much your monthly payment will decrease and your total savings over the life of the loan.
Even a small reduction in your interest rate can result in significant long-term savings, especially if you have a large loan.
Use Compass Mortgage’s Refinance Calculator to estimate your potential savings per month.
What are the costs of refinancing?
Refinancing involves closing costs ranging from 2-6% of the loan amount.
Consider whether you can afford the costs to refinance and whether your potential savings will outweigh the upfront costs.
How long do I plan to stay in my home?
Refinancing makes the most sense for borrowers who can reach their break-even point, which is the time it takes for you to offset the costs of refinancing.
Refinancing may not be worth the upfront costs if you don’t intend to stay in your home for much longer.
Tips for homebuyers
The “right time” to purchase a home is a personal decision based on your needs, goals and current financial situation.
Here are our best tips for helping homebuyers navigate the current market:
- Act quickly: Get a loan commitment from Compass Mortgage so you can lock in current rates and be ready to make an offer when the time comes.
- Focus on affordability: Even with a lower interest rate, make sure the sale price and monthly payments fit your financial goals.
- Plan your down payment: A larger down payment can help reduce your loan amount and lower your monthly payments.
Keep an eye on interest rates and home prices in your target area so you can find the best deal.
Lock in your rate today with Compass Mortgage
A loan commitment from Compass Mortgage essentially has the power of a cash offer, showing the seller you’re fully approved financially and your deal isn’t likely to fall through.
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