3 critical mortgage questions to ask before interest rates are cut

Interest rate cuts are finally in the works. With inflation down significantly from a four-decade high in June 2022, a cut to the federal funds rate appears imminent. Currently frozen at a range between 5.25% and 5.50%, the CME FedWatch tool now projects a 100% certainty that the Federal Reserve will cut the rate when they meet again in September. And possibly again in November and once more in December.

This is great news for homebuyers and current homeowners looking to refinance. While the federal funds rate doesn't directly mirror what lenders offer on mortgage rates, they do tend to mimic one another. So a reduction in the first will inevitably lead to lower mortgage interest rates (they're already down almost a full point from where they were at the end of 2023). 

But a changing rate climate will pose new challenges in addition to new opportunities, both of which buyers should prepare for right now. And they can do so by gathering the answers to select questions in advance. Below, we'll list three of the critical questions homebuyers should start thinking about right now.

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3 critical mortgage questions to ask before interest rates are cut

Are you considering a home purchase in today's evolving rate climate? Then it could be beneficial to have the answers to the following critical questions:

How much will rates be cut by?

Mortgage interest rate cuts will be welcome no matter the degree but it's critical to understand how much rates will be cut by. Many lenders have likely already "priced in" presumed interest rate cuts to come in September, so even if the Fed issues a 25 basis point cut after their meeting on September 18, mortgage rates are unlikely to fall much further from where they are now (an average around 6.50% for a 30-year loan). 

The real savings, however, could come in the following months if the Fed both continues to cut rates and, potentially, does so by bigger margins. A 50 basis point cut in November, for example, combined with an earlier 25 basis point reduction could result in substantial savings for those buyers who wait. But is it worth waiting?

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Is it worth waiting for rates to fall?

While you could potentially save a few hundred dollars on a mortgage if you wait a few months (depending on the price, rate and down payment), it's not as clear a choice as it may seem on paper. Waiting poses its own set of complications, not least of which can be increased competition as more buyers enter the market once rates have fallen. 

Seeing this spike in buyer competition, then, sellers could theoretically raise home prices to take advantage, easily wiping out any savings buyers secure with a slightly lower rate than currently available. So it's important to weigh the ramifications of waiting versus acting now to determine if delayed action really is as beneficial as it seems at first glance. 

Will rates go down to what they were?

Mortgage interest rates surged in recent years thanks to a series of consistent rate hikes courtesy of the Federal Reserve. But they're not expected to drop as quickly as they rose from 2022 to 2024. And it would be difficult to find an economist or expert who expects mortgage interest rates to fall back to the level they were at in 2020 or 2021 when the economy was reeling from the pandemic. Those were an anomaly and, upon closer inspection, today's rates are more in line with historic norms. So if you were planning on waiting for rates to fall to the 2% to 3% range from recent years, you may be waiting for a very long time.

The bottom line

Homebuyers should be happy that mortgage interest rates are falling again but they should also be smart and strategic in their approach to an evolving market. This extends to having the answers – or, at a minimum, contemplating the answers – to the above questions. By thinking of these intangibles now, buyers will be better prepared to act when an opportunity arises later this year or in 2025.