The Federal Reserve is currently contemplating making its first interest rate cut in years this fall, which could potentially drive down mortgage rates. Even minor cuts in rates have the potential to significantly impact what homebuyers will end up paying. Prospective homebuyers have been eagerly anticipating the central bank’s decision to lower rates. While the Fed is convening this week, experts suggest that the initial rate reduction is more likely to occur in September. This would mark the first rate decrease since 2020 during the onset of the Covid-19 pandemic.
Analysts forecast a less than 6% probability of a rate reduction in the forthcoming Federal Open Market Committee meeting, according to CME’s FedWatch futures market pricing measure. However, there is a considerably higher chance of quarter-point decreases in September, November, and December. Some experts project that these anticipated rate cuts, along with additional reductions in 2025, could bring the Fed’s benchmark fed funds rate below 4% by the end of next year. While mortgage rates are typically fixed and mostly linked to Treasury yields and the overall state of the economy, they are also somewhat influenced by the Fed’s policy decisions.
Home loan rates have already begun to decrease, partly due to the Fed signaling a slowdown. Chen Zhao, the economic research lead at Redfin, emphasized that the financial markets have already largely factored in the first rate cut, particularly bond markets. Consequently, mortgage rates may not undergo significant changes once the Fed officially initiates the reduction. In recent data released by Freddie Mac, the 30-year fixed rate mortgage dropped to 6.78% on July 25 from 7.22% on May 2.
With rates starting to trend downward, refinancing activity on existing home loans has been on the rise. Refinance activity soared by 15% from the previous week, reaching its highest level since August 2022, according to the Mortgage Bankers Association. Selma Hepp, chief economist at CoreLogic, highlights that the decision to refinance hinges in part on the borrower’s existing rate. Homeowners who secured loans when rates peaked at 8% last fall may find significant opportunities for cost savings through refinancing.
Experts advise that to benefit from refinancing, homeowners usually require a noticeable drop in mortgage rates, with the prevailing rate being at least 50 basis points lower than their current rate. Nevertheless, the decision to refinance is not solely based on this rule. It is crucial to consider factors like monthly mortgage payments and the ability to cover closing costs. Jacob Channel, senior economist at LendingTree, emphasizes the importance of carefully assessing these variables to determine the optimal timing for refinancing.
When contemplating refinancing, homeowners should weigh the potential benefits against the upfront costs involved. Zhao suggests that even if the existing mortgage bears a high rate, it might be favorable to wait until the Fed has made more substantial rate cuts. This strategic approach anticipates a continued decline in rates throughout the year and into 2025. Channel recommends that individuals considering refinancing should consult with lenders to evaluate whether refinancing now or at a later time aligns best with their financial goals.
While lower mortgage rates can be a welcome relief for budget-conscious homebuyers, the true ramifications of reduced borrowing costs remain uncertain. Zhao points out that if borrowing costs decline, there is a possibility that more buyers will enter the market. However, if demand surpasses supply, housing prices might escalate further, effectively counteracting the benefits of lower mortgage rates. Channel stresses that predicting the exact trajectory of the housing market is exceedingly challenging, and waiting for ideal market conditions may prove to be an endless endeavor.
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