How low will mortgage rates drop after the Fed cuts rates? Experts weigh in

With Fed rates holding steady over the last couple of years, mortgage interest rates have stayed high overall — even hovering close to 8% at one point recently. And those high mortgage loan rates, coupled with the high cost of living and inflation, have led many potential homebuyers to pause their search for a home and a mortgage to buy it with.

But in recent weeks, there has been some welcome news for potential homebuyers. Inflation has cooled slightly — and mortgage rates fell to a four-month low in tandem. A Fed rate cut is also likely on the horizon for September, which would cause mortgage interest rates to drop even more. 

How much would a Fed rate cut impact mortgage rates, though? If you're ready to buy a home, here's how much you can expect mortgage rates to fall after the Fed cuts rates. 

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How low will mortgage rates drop after the Fed cuts rates? Experts weigh in

While a Fed rate cut is expected to occur in the next couple of months, experts say the subsequent drop in mortgage rates may not be as significant as many potential homebuyers would like.

"Based on my experience of more than a decade of mortgage lending, I expect a Fed rate cut of 0.25% in September," Phil Galante, a mortgage broker at ProMortgage, says. "I don't anticipate a dramatic decrease in mortgage rates if the Fed cuts its rates by 0.25%."

Part of that is due to the recent drops we've seen in mortgage rates. While today's mortgage rates aren't as low as we saw during the early years of the pandemic, they're already down from their recent highs. Those drops have been due, in large part, to the anticipated Fed rate cuts on the horizon.

"We have already seen some of the benefits of a future rate cut in today's mortgage rates," Melissa Cohn, regional vice president at William Raveis Mortgage, says. "However, a Fed cut will reflect weakening economic conditions, which should push bond yields down and mortgage rates lower as well." 

Michael Isaacs, CEO of GO Mortgage, doesn't expect to see a significant decline after the Fed rate cut since we've seen a drop in mortgage rates already. In turn, we shouldn't expect rates to fall significantly, Isaacs says, but even a slight dip might encourage some would-be homebuyers to start looking.

Cohn agrees that heftier mortgage rate drops could occur next year — and may not necessarily happen during the remainder of this year.

"The first Fed rate cut could have no or little impact on mortgage rates," Cohn says. "If the Fed continues to cut rates through 2025 and the economy remains in lower gear with inflation closer to 2%, then [it's] possible that rates drop by 1% to 1.5% in the next 18 months. This is all predicated on inflation remaining low."

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Why the Fed rate cut matters to mortgage rates

Mortgage rates aren't directly tied to the Fed rate; multiple factors influence them. However, when the Fed makes changes, mortgage rates tend to follow.

"When the economy is weak and unemployment [is] high, as happened in the early part of COVID, the Fed stimulates the economy by decreasing the Fed funds rate and loosening the nation's money supply. This puts more money into circulation," says Galante. "When the economy is hot and inflation high, the Fed tightens the nation's money supply by raising the Fed funds rate and banks charge one another more for short-term loans. Lenders, in turn, pass these costs to the consumer by raising rates on longer-term loans like mortgages."

That's why mortgage interest rates could start to drop after the Fed cuts rates, which would be good for those who have been trying to buy a home, says Alex Elezaj, chief strategy officer at United Wholesale Mortgage (UWM).

"Lower mortgage rates could further stimulate the housing market, and encourage potential homebuyers who have been sitting on the sidelines to enter the market," Elezaj says. "The momentum has been significant, and we expect this to continue."

The bottom line

A slight dip in mortgage rates could happen after the Fed cuts rates, experts say, but it's important to remember that mortgage rates have already been dropping.

"Mortgage rates have been gradually dropping for the past four months," Galante says. "Anticipating the Fed's rate cut lenders have already priced their mortgages lower."

And while there's been a gradual drop in rates, home prices haven't fallen with them. The demand for single-family homes continues despite today's high mortgage rates, and a lower rate may only increase that demand.

"The dramatic increase in mortgage rates since 2022 didn't cause an equally dramatic decrease in housing prices despite a substantial decrease in home purchases because demand for single-family homes is far greater than the supply," Galante says. "A drop in interest rates will most likely increase competition for homes and further increase home prices."