Interest rates are paused. Here's why that's good news for homebuyers.
The Federal Reserve announced today that it was leaving the federal funds rate paused for the third consecutive time, deciding against another rate hike, despite inflation still being above the target goal of 2.0%. The decision to pause rates will have reverberations throughout the economy, including on the mortgage market, where 18 months of rate hikes have left potential buyers facing high rates after more than a decade of relatively low rates on mortgages. Today's pause could signal better times ahead for homebuyers, though – especially if the Fed follows through on rate cuts in 2024.
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Interest rates are paused. Here's why that's good news for homebuyers.
The decision by the Fed to pause hikes to its benchmark rate doesn't directly impact the rates consumers get for lending and savings products, but those rates do tend to track alongside the federal funds rate. Here's what could happen after this most recent pause.
Mortgage rates could fall
Mortgage rates already fell after the two previous pauses to the federal funds rate. On November 1, the date of the second pause, the average age interest rate for a 30-year fixed-rate mortgage was 8.06%. For a 15-year mortgage, it was 7.20%. As of December 13, those rates stand at 7.31% and 6.70%, respectively.
While there's no guarantee, mortgage rates may continue to go down in response to the recent pause. With another Fed meeting not scheduled until the end of January, there is plenty of time for rates to respond to this pause before any more possible action is taken.
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Rate cuts could happen in 2024
While a pause to the federal funds rate is good for homebuyers, a cut would be even better. While the Fed declined to cut rates in December, chair Jerome Powell said in his press conference that he expects cuts in 2024.
"The appropriate level [of the federal funds rate] will be 4.6% at the end of 2024," he said. That projection, which would be a total cut of 0.75%, depends on the Fed's economic projections turning out to be true.
If the Fed does cut rates by 0.75% during the year — which would likely be spread across three different meetings — it could mean bigger drops in interest rates for people taking out mortgages.
While it is unlikely that rates will get back to where they were before the rate hikes, when some homebuyers obtained interest rates below 3%, this would still be much-needed relief and could allow buyers who were priced out by high rates to get back into the market.
Refinancing rates could also come down
The rates for those looking to refinance their homes have also been going down recently. On November 1, the average rate for a 30-year refinance was 8.15%, while for a 15-year refinance it was 7.54%. Today those rates stand at 7.45% and 6.72%, respectively.
As with rates for new mortgage purchases, refi rates could continue to decline in the coming months in response to the rate pause — and they could come down even more next year once the Fed starts cutting rates.
Lower refinancing rates could be a balm for those who purchased a home in the past year and feel stung by the high rates. Refinancing does come with expenses — closing costs are paid again, as are other fees — but the ability to lower your monthly payment could be worth it for some homeowners who bought at the height of the high-interest period.
The bottom line
The Fed chose to pause interest rates today for the third consecutive time. This decision will likely impact many parts of the economy, including the mortgage market. Interest rates for mortgages could continue to drop in response to the pause, and they could go down even more next year when the Fed is expected to start making rate cuts. The same goes for refinancing a mortgage, which could help those who bought homes when rates were higher.
