Mortgage mistakes to avoid once interest rates are cut
Homebuyers patiently waiting for a break with mortgage interest rates don't have to wait much longer. Not only have rates fallen by more than a point from where they were at the end of 2023, but they will drop further in the weeks and months ahead if the Federal Reserve proceeds with an expected series of rate cuts. This will be welcome news for all types of borrowers, but specifically those looking for mortgages. After all, mortgage rates have increased exponentially from where they were in 2020 and 2021 and they hit their highest level since 2000 last summer. So any reprieve will be helpful, particularly as home prices continue to tick upward.
Like any financial product, however, homebuyers will need to take a nuanced and strategic approach when applying for a mortgage. And this is particularly true in the face of as many as three potential cuts to the federal funds rate this year. While there are multiple ways to prepare for mortgage interest rate cuts, there are also some easy-to-make mistakes that should be avoided. Below, we'll break down three of them.
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Mortgage mistakes to avoid once rates are cut
Here are three critical mistakes to avoid amid this unique homebuying season:
Assuming mortgage interest rates will fall in line with the Fed
Yes, a lower federal funds rate will lead to lower mortgage interest rates. But a reduction in the former won't lead to an identical reduction in the latter. Mortgage interest rates follow the Fed, but they aren't directly dictated by what the Fed does. So a 25 basis point reduction may not automatically result in a 25 basis point difference for mortgage interest rates. Many lenders may have already priced in these predicted rate cuts in their current offers. So, the difference in what you're offered now and what you're offered at the end of the month may be marginal. Be sure to account for this when trying to time your mortgage application.
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Waiting for rates to drop even further later this year
As noted, mortgage interest rates don't move in tandem with the Fed, so waiting for multiple rate cuts to come may not provide the relief you anticipate. But even if it did, waiting for rates to drop even further could cause its own set of complications. Once rates are cut, more buyers are likely to enter the market, causing competition for limited housing inventory to become stronger. And with more buyers for a finite amount of inventory, home prices, which are already averaging over $420,000 now, could rise even further. So consider these intangibles now, because a minor rate reduction in November, for example, may not be enough to outweigh a much higher home price.
Assuming you'll get the rate listed on lender websites
Mortgage interest rates listed on lender websites and online marketplaces are designed to attract buyers, thus appearing lower than what you can likely secure. Remember, these rates are typically low because they're listed for qualified borrowers with reliable income and high credit scores. If you don't have both, the rate you're offered could be significantly higher. Some lenders also account for mortgage points in the rates listed. So if you don't want to pay the fee those points cost, the rate you're offered could again be significantly higher. Understanding this, then, be sure to ask the lender you're working with exactly what you're eligible for because it may not be what you see listed online.
The bottom line
A cooling rate climate can be beneficial for homebuyers who have sat on the sidelines in recent years. To make the most of the opportunity, however, they should both take steps to prepare in advance for these developments and avoid making the above mistakes. By doing both they'll better position themselves to secure a cost-effective mortgage loan, saving them time and money now and over the full term of the loan.
