What will happen to mortgage rates after this week’s Fed rate cut?

Those looking to buy a home finally got a major reprieve in September Mortgage rates fell to their lowest point in two years. That came just before the Federal Reserve issued a larger-than-expected 50 basis point interest rate hike reduction in the federal funds rate. And that came after years of rising interest rates, which at one point put pressure on mortgage rates highest level since 2000. But a September rate cut would be a harbinger of a broader, cooling mortgage rate environment.

But that’s not what happened in October. Encouraged by positive economic data on inflation and unemployment, lenders began raising rates as quickly as they dropped them, figuring that future rate cuts were unlikely to be as substantial as September’s. And homebuyers and people looking to refinance suffered, as they saw rates on purchases and refinancings increase again by about a full percentage point. Despite the 50 basis point cut, mortgage rates as of Oct. 31 were just 6.72% on a 30-year mortgage — which is virtually the same as on Aug. 1, before rates were even cut, according to FreddieMac data.

This week, however, the Federal Reserve will reconvene for its first meeting since September’s rate cut, and another cut appears likely. So there is reason for cautious optimism. But what exactly will happen to mortgage rates after this week’s Fed rate cut? That is what we will try to explain below.

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What will happen to mortgage rates after this week’s Fed rate cut?

The CME Group’s FedWatch tool has a probability of a rate cut of 25 basis points, with greater than 99% certainty. The Fed Funds rate will therefore almost certainly fall again, this time to a range between 4.50% and 4.75%. But the effect this will have on current mortgage rates will probably remain limited for various reasons. Here are three:

Discounts are already priced in: Many lenders already assume that the federal funds rate will fall by 25 basis points and have preemptively priced these cuts into their offers. So you’re unlikely to see a big difference between the rates on offer now and those offered by the end of the week. That said, if the cut is 50 basis points instead of the predicted 25, mortgage rates could fall by a larger margin.

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Mortgage rates are influenced by more than just the Fed: As demonstrated in October when that was the case no Fed meeting While there continues to be a significant increase in mortgage rates, borrowers should know that mortgage rates are not solely affected by Fed actions. Unemployment and inflation data can also influence what lenders offer borrowers. And the Interest on 10-year government bonds also has a big impact. So if these all don’t move in a positive direction for borrowers, a Fed rate cut of just 25 basis points likely won’t help much (if at all).

The relief will take place gradually: The dramatic interest rate cuts that many borrowers experienced in 2020 may have led some to believe that interest rates could change quickly and dramatically. But that was a direct result of the pandemic, and since inflation rose, interest rate increases have been gradual for much of the past two years. The enlightenment will therefore take place gradually.

Multiple reductions in the Federal Funds Rate will need to occur, likely in increments of more than 25 basis points, before borrowers can experience relief. And a number of factors could keep these increases small – or even lead to a complete pause in rate cuts. Understanding this real potential, so borrowers who have found their dream house now it may be better to buy it anyway – and refinancing their mortgage when the interest rate environment has leveled off.

The bottom line

Mortgage rates could fall again after this week’s predicted Fed rate cut, but major relief will likely be delayed. That’s because this week’s discount is expected to be minimal and has already been priced in in advance by many lenders. Furthermore, mortgage rates aren’t just affected by what the Fed does or doesn’t do, and it will likely take as much time to get rates back down as it will to get them up. So if you’ve found a home you want to buy or you’ll now see significant relief from refinancing even if the available rates aren’t ideal, consider taking action anyway.

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