What will mortgage interest rates look like this September?

The mortgage market has been on a wild ride over the last several years. It all started when rates plummeted to historic lows in 2020 and 2021, with 30-year mortgage rates dipping below 3%. As the economy rebounded and inflation surged in the two years following, things changed drastically. The Federal Reserve embarked on an aggressive rate-hiking campaign, which drove up mortgage rates significantly and made it tough to borrow at an affordable rate.

With the Fed rate remaining locked at a 23-year high, mortgage rates remain elevated even now. While today's rates aren't as high as the 8% mortgage rates that we saw in late 2023, the average rate is currently 6.57% for 30-year mortgage loans and 5.95% for 15-year mortgage loans — so it's still expensive for the average buyer to finance a home. But things may not stay this way for much longer.  

Inflation has been cooling over the last four months and is now inching closer to the Fed's 2% target rate. In turn, changes could be coming to the interest rate environment as soon as next month. So what can we expect mortgage interest rates to look like this September? That's what we'll break down below.

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What will mortgage interest rates look like this September?

Most analysts and experts expect that the Fed will conduct its first rate cut of the year at its meeting next month, which is scheduled for September 17 to 18. The CME FedWatch tool also suggests a high likelihood of a rate cut occurring and predicts that the federal funds rate will be reduced to a range of 5.00% to 5.25% — a drop of 25 basis points from the current range of 5.25% to 5.50%. 

That anticipated Fed rate cut won't directly impact mortgage rates, but it could influence them. However, it's crucial to temper your expectations, as any initial drop in mortgage rates is likely to be modest. 

For example, if the Fed cuts rates by 25 basis points (0.25%) next month, we might see the average 30-year mortgage rate fall from its current 6.57% to around 6.32%. On a $300,000 loan, this would translate to a monthly payment reduction of about $49 – from $1,910 to $1,861. It would also have an impact on the total interest paid over the longer term.

To put this into perspective, let's look at the total interest paid over the life of the loan:

• At 6.57%: The total interest paid over 30 years would be approximately $387,612.
• At 6.32%: The total interest paid over 30 years would be approximately $369,899.

This represents a potential savings of $17,713 in interest over the full term of the mortgage – a significant amount despite the seemingly small monthly difference.

For 15-year mortgages, a similar 25 basis point reduction from the current 5.95% could bring rates closer to 5.70%. On a $300,000 loan, this would lower your payments by approximately $40 each month – dropping from $2,523 to $2,483.

It would also impact the total interest paid over the life of the 15-year mortgage:

• At 5.95%: The total interest paid over 15 years would be approximately $154,225.
• At 5.70%: The total interest paid over 15 years would be approximately $146,976.

This represents a potential savings of $7,249 in interest over the 15-year term.

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Looking beyond September

While September may bring some relief in terms of mortgage rates, it's important to maintain a long-term perspective. The era of ultra-low rates we saw in 2020-2021 is unlikely to return anytime soon. 

However, if inflation continues to moderate and economic growth remains stable, we could see a gradual decline in rates over the coming months and into 2025. This decline is likely to be measured and deliberate, though, rather than dramatic.

How to prepare for lower mortgage rates

If you're planning to take out a mortgage loan once rates drop, there are a few things you can do to prepare:

• Improve your credit score: Even in a falling rate environment, the best rates are reserved for those with excellent credit. Take steps now to boost your score by paying down debt, ensuring on-time payments and addressing any errors on your credit report.
• Stay informed: Keep an eye on what happens with the Fed and any other economic indicators. While you can't time the market perfectly, being informed can help you make better decisions.
• Explore different loan types: While 30-year fixed-rate mortgages are the most common option, other loan types, like 15-year mortgages or adjustable-rate mortgages (ARMs) might offer lower rates, so make sure to compare your choices.
• Be ready to act: If rates do start to fall more significantly, be prepared with your documentation and pre-approvals so you can move quickly.

The bottom line

The mortgage market appears poised for a potential shift next month, which could be your opportunity to lock in a better mortgage rate. While mortgage interest rates are unlikely to see a return to the rock-bottom rates of recent years, even small decreases, like the one expected in September, can make a significant difference over the life of a loan. And remember: If you find a rate that works for your budget now, don't hesitate to lock it in. Waiting for lower rates is always a gamble, especially in today's unusual economic landscape.