How far will mortgage interest rates drop this week?
The moment borrowers have been waiting for has arrived, and with a bigger impact than expected. After contending with the highest federal funds rate in decades, the Federal Reserve has issued its first rate cut since 2020 this week, surprising markets with a more aggressive move than anticipated. Following the two-day meeting, the Fed announced a reduction in the federal funds rate by 50 basis points, bringing it down from a range between 5.25% and 5.50% to a new range of 4.75% to 5.00%. This marks a significant shift from the 23-year high we've seen for more than a year.
While most analysts had expected a 25 basis point cut, the Fed's decision to go for a more substantial 50 basis point reduction has caught the market off guard. Borrowers may now want to watch closely to see how much relief this larger-than-expected cut will bring. With credit card interest rates hovering near a record and mortgage rates only slightly down from their highest point since 2000, the consequences of this week's rate cut could be more widespread than initially thought. Homebuyers, in particular, should start taking steps now to capitalize on this development.
But how far will mortgage interest rates actually drop this week? While speculation varies, the immediate effect may be more substantial than previously anticipated. Below, we'll explain why.
See how low of a mortgage interest rate you could lock in here now.
How far will mortgage interest rates drop this week?
In light of the Fed's unexpectedly large rate cut, mortgage interest rates may see a more significant drop than initially projected.
While many mortgage lenders had already priced in a presumed 25 basis point cut, the additional 25 basis points could lead to a more noticeable decline in mortgage rates. Today's mortgage rates are already sitting at a two-year low of 6.15% right now, but we might see a more substantial decrease, potentially pushing rates closer to the 6% mark.
However, it's important to note that many of the upcoming changes to mortgage interest rates will still be cumulative as additional rate cuts are issued and further changes to the federal funds rate start to be priced in. The market will also be closely watching the Fed's forward guidance for clues about future rate decisions.
With Fed meetings set again for November and December, additional reductions seem likely, especially if economic data supports such moves. Keep in mind that economic indicators surrounding inflation and unemployment could still influence mortgage rates as well.
Mortgage rates also track alongside the rate on the 10-year Treasury yield. When that ticks up, mortgage rates tend to follow and when it falls, mortgage rates often decline. So keep an eye on that performance, too, and watch the market daily for opportunities to capitalize on any developments that could cause rates to fall, even if it's a temporary decline.
Start shopping around for mortgages online today.
What about home prices?
While many buyers are understandably focused on securing the lowest mortgage interest rate possible, it's also important to weigh these potential savings against what could be a rapidly changing real estate market. With this larger-than-expected rate cut, more buyers could enter the market sooner than anticipated, potentially causing already elevated home prices to rise even further. The average U.S. home price reached a record high this year, growing to just under $427,000. And that was with high rates frozen.
What's going to happen, then, with this substantial rate cut and the likelihood of mortgage interest rates declining more quickly? Buyers will need to carefully consider this potential scenario and work toward determining whether waiting for further drops in mortgage rates is worth potentially paying significantly more for a home.
The bottom line
Mortgage interest rates are heading in the right direction, both for buyers and current owners hoping to refinance, and this surprising 50 basis point cut could accelerate the process. While it may not result in an immediate dramatic cut in mortgage rates, it sets the stage for a potentially faster decline in the weeks and months ahead. Prospective homebuyers and those looking to refinance should closely monitor the market, as opportunities may arise sooner than expected. Weigh the costs of waiting to act versus some of the benefits of locking in a lower mortgage interest rate now, keeping in mind that the real estate market dynamics could shift quickly in response to this move.
