How far will mortgage interest rates drop this week?
The moment borrowers have been waiting for is quickly approaching. After contending with the highest federal funds rate in decades, the Federal Reserve is preparing to issue its first rate cut since 2020 as it meets this week. Following the two-day meeting, the Fed is expected to announce a reduction in the federal funds rate, which has been frozen at a range between 5.25% and 5.50% for more than a year. That's the highest it's been in 23 years.
While it's not yet known if the Fed will issue a 25 basis point cut or a more aggressive half a percentage point reduction, borrowers will be closely watching to see how much relief they can then expect to see. 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 are hoping to be widespread. And homebuyers, in particular, should start taking steps now to prepare.
But how far will mortgage interest rates actually drop this week? While speculation varies, the immediate effect may not be particularly powerful. Below, we'll explain why.
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How far will mortgage interest rates drop this week?
In short: Mortgage interest rates may not fall very far this week (if they drop at all).
That's because many mortgage lenders have already priced these presumed rate cuts into their current offers. So what you see listed on a bank website today may not be materially different from what you see posted on Thursday or even on Friday after rate cuts have had a chance to reverberate through the market. So today's average 6.41% rate for a 30-year mortgage isn't likely to drop to 6.16% this week, even if the federal funds rate is cut by 25 basis points, as many expect.
Instead, the changes to mortgage interest rates will be cumulative as multiple rate cuts are issued and additional changes to the federal funds rate start to be priced in in response.
With Fed meetings set again for November and December, again, additional reductions seem likely. But they won't fall in direct relation to the Fed's actions. Economic data surrounding inflation and unemployment could influence mortgage rates as well.
They 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.
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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. As rates come down, more buyers could enter the market, 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, when rate cuts start being issued and mortgage interest rates decline? Buyers will need to carefully consider this potential scenario and work toward determining if waiting for a slight difference 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. But it will be a gradual process in which multiple Fed actions and a series of encouraging economic reports will need to be released to significantly ease mortgage costs. So don't expect a dramatic cut this week. Instead, start preparing for a cooler mortgage rate climate in the weeks and months ahead and weigh the costs of waiting to act versus some of the benefits of locking in an imperfect but still lower mortgage interest rate now.
