As mortgage rate cuts loom, here's how much homebuyers could save

Thanks in large part to the elevated rate environment, the cost of buying a home has vastly increased over the last several years. In turn, more and more buyers have been priced out of the market — at least temporarily. After all, today's mortgage rates are over two times as high as they were during the pandemic when rates below 3% were available to many buyers. 

And when you add in the other complicating factors, like an uptick in home values and limited for-sale inventory in most markets, it's easy to see why so many people are opting to try and wait out the housing market. The high cost of buying a home means it's simply not feasible for many would-be buyers — especially those with limited budgets — to try and compete right now.

That could change soon, though. After a prolonged period of high interest rates aimed at curbing inflation, the Federal Reserve is now expected to cut rates soon, which could have a big impact on the cost of buying a home. But how much can homebuyers expect to save once those rate cuts happen? That's what we calculated below.

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As mortgage rate cuts loom, here's how much homebuyers could save

Mortgage rates, though not directly set by the Fed, tend to follow the federal funds rate closely. As such, when the Fed lowers its benchmark rate, mortgage rates typically decrease as well. 

Experts anticipate the first Fed rate cut to happen in September and are forecasting it to be a drop of about 0.25%. If inflation continues to improve, analysts expect to see cumulative Fed rate reductions of between 0.75% to 1% over the next 12 to 18 months. Should mortgage rates fall in a similar pattern — by 0.25% in September and by 0.75% to 1.0% over time — buying a home could get a lot cheaper. 

To illustrate the potential savings, let's consider a $398,000 mortgage — which is the average home price nationwide right now — under the different scenarios:

The cost at today's rates

• 30-year mortgage loan at 6.86%: The total interest paid over the life of the loan would be $541,812 and the total cost of the loan would be $939,812.

The cost after a potential 0.25% drop in September

• 30-year mortgage at 6.61%: The total interest paid over the life of the loan would be $518,017 and the total cost of the loan would be $916,017.
• Total savings: $23,795 over the life of the loan

The cost after a potential 0.50% cumulative drop

• 30-year mortgage at 6.36%: The total interest paid over the life of the loan would be $494,476 and the total cost of the loan would be $892,476.
• Total savings: $47,336 over the life of the loan

The cost after a potential 0.75% cumulative drop

• 30-year mortgage at 6.11%: The total interest paid over the life of the loan would be $471,195 and the total cost of the loan would be $869,195. 
• Total savings: $70,617 over the life of the loan

The cost after a potential 1.0% cumulative drop

• 30-year mortgage at 5.86%: The total interest paid over the life of the loan would be $448,182 and the total cost of the loan would be $846,182.
• Total savings: $93,630 over the life of the loan

It's important to note that these projections are based on current expectations and market conditions. The actual trajectory of rate cuts and their impact on mortgage rates may vary depending on economic factors and the Fed's decisions in the coming months.

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The bottom line

As these calculations demonstrate, even a modest 0.25% rate cut could result in significant savings over the life of a mortgage loan. And the potential savings become even more substantial with larger rate reductions. For a 30-year mortgage, homebuyers could save over $93,000 in interest over the life of the loan if rates drop by 1%.

But while the prospect of future rate cuts is encouraging, taking proactive steps now can lead to significant savings regardless of how the market evolves. Even small differences in interest rates can translate to much lower costs on your mortgage, so putting in the work now to improve your credit, lower your debt-to-income ratio and find the right lender could also pay off.