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For the second time in three months, the Federal Reserve issued a cut to its federal funds rate on Thursday. Now at a range between 4.50% to 4.75%, the rate is down 75 basis points from where it was on September 1. And, if inflation continues to decline, it could fall even further when the Fed meets again in December in its final meeting of 2024. While not great news for savers who have been accustomed to high rates on select savings accounts, this is generally welcome news for borrowers who have had to pay more for mortgages, credit cards and more.
Mortgage rates, in particular, surged last year to their highest level since 2000 but have since come down alongside inflation. But it’s been a bumpy ride back to the bottom in recent weeks. What, then, does this latest Fed rate cut mean for mortgage interest rates? That’s what we’ll break down below.
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What the Fed rate cut means for mortgage interest rates
In short, Thursday’s rate reduction, as welcome as it is, is unlikely to do much for mortgage interest rates. Here’s why:
It was only a 25 basis point cut
Ahead of September’s larger-than-expected 50 basis point cut, mortgage rates plunged to a two-year low. That gave homebuyers ready to act and some homeowners looking to refinance a window of opportunity to realize some savings opportunities. But this week’s cut was by just 25 basis points. That’s a move in the right direction, assuredly, but not significant enough to result in a huge reduction in mortgage rates. And since lenders take multiple factors into account for their mortgage rate offers – not just the federal funds rate – it’s unlikely that mortgage rates will even drop by the same percentage amount that the federal funds rate just did.
See what mortgage rates are available now that the Fed’s cut rates again.
It was priced in by lenders
Homebuyers who checked mortgage interest rates on Monday of this week and then checked them again after the Fed meeting may have been surprised to see the same or a slightly altered rate offer. That’s likely because today’s cut was already preemptively priced in by lenders in anticipation. This happens frequently as lenders monitor the market and make the appropriate adjustments to their rates. This is why you should be checking mortgage interest rates daily for an opportunity to capitalize on a below-average rate.
Other factors are offsetting these cuts
There was no October Federal Reserve meeting. And yet mortgage interest rates rose by more than a point in the month. Why is that? That’s because other factors affect mortgage interest rates besides just what the Fed does (or doesn’t do). And some of these other factors, like the unemployment and inflation rate, can and often will offset the formal rate reductions issued by the Fed. The 10-year Treasury yield also plays a vital role in the direction that mortgage interest rates follow. So, while a Fed rate cut will theoretically help lower mortgage interest rates, it’s often a much more complicated set of factors that push rates along.
The bottom line
A Fed rate cut is only one part of the calculation for borrowers looking to secure a low mortgage interest rate. That noted, waiting for an ideal time to buy comes with its own set of complications. In today’s market, then, it may be worth buying now, particularly if you find your dream home, and refinancing at a time when rates have finally fallen to a level you’re comfortable with.
Learn more about your current homebuying options online.