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Mortgage rates have been high over the last few years, but it appears that may be changing. With inflation cooling, mortgage rates finally dropped in August to 6.47%, the lowest rate across the prior 15 months. Federal Reserve Chair Jerome Powell also suggested last week that the central bank will cut rates in September, which would likely have an impact on mortgage rates.
Although these anticipated interest rate cuts offer prospective buyers hope, there’s no guarantee of how low rates will drop and for how long. The current average rate for a 15-year fixed rate mortgage loan is 5.92% while the 30-year fixed rate mortgage stands at 6.53%, and any drop to these rates would make homebuying more affordable.
Will Federal Reserve rate cuts drop interest rates low enough to make it affordable enough for the average buyer, though? Here’s what mortgage rates could look like in September.
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How low could mortgage rates drop this September?
The key event to watch is the Federal Reserve meeting scheduled for September 17-18. Many financial experts and market watchers believe that is when the Fed will cut its key interest rate for the first time this year. The Fed also indicated recently that it is likely to cut rates at the September meeting.
It’s important to understand that the Fed doesn’t directly set mortgage rates. However, its decisions have a significant influence on the overall interest rate environment. When the Fed lowers its rate, it generally becomes cheaper for banks to borrow money, which can lead to lower interest rates across the board, including on mortgages.
So how much will a September Fed rate cut impact mortgage rates? Buyers who are eagerly anticipating a significant mortgage drop in September may want to temper their expectations.
Rose Kemp, president of the Orlando Regional Realtor Association, notes that the 3% rates seen during the COVID-19 pandemic were historically low due to an unprecedented event. She also states that the current mid-6% rate range is below average compared to the last 50 years.
The general consensus among analysts and experts is that the Fed benchmark rate will be lowered by 25 basis points in September. If the Fed cuts rates as expected, here’s what we might see in the mortgage market:
30-year fixed-rate mortgages:
- Current mortgage rate: 6.53%
- Possible new mortgage rate: 6.28% (a 0.25% drop)
- Impact on a $300,000 loan:
- Monthly savings: About $67
- Total savings over 30 years: Around $17,700 in interest
15-year fixed-rate mortgages:
- Current rate: 5.92%
- Possible new rate: 5.67% (a 0.25% drop)
- Impact on a $300,000 loan:
- Monthly savings: About $40
- Total savings over 15 years: Around $7,200 in interest
While these monthly savings might seem modest, the long-term impact could be substantial. Saving over $17,00 throughout the life of a loan could mean extra funds for home improvements, your child’s education or your retirement savings.
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What about the rest of 2024 (and beyond)?
While we might see rates start to drop in September, a return to the record-low rates of 2020-2021 is highly unlikely, even over time. Those rates were a result of extraordinary economic circumstances during the pandemic.
However, inflation keeps cooling, we could see rates gradually decline through the remainder of 2024 and into 2025. This decline is likely to be slow and steady, however, rather than sudden and dramatic.
According to a recent poll of economists, half of respondents believe that the federal funds rate will decrease by 25 basis points at each of the next three Fed meetings slated to be held between September and December. Should that happen, it would drop the rate to a range of 4.50% to 4.75% by the end of the year.
The bottom line
With a high likelihood of the Fed cutting rates in September, many lenders and borrowers are anticipating a mortgage rate drop. Still, many experts believe you shouldn’t wait for mortgage rates to fall if you’re planning to buy a home. While it’s a good idea to monitor both mortgage rates and the Fed’s moves, that shouldn’t stop you from investigating how you can secure a low mortgage rate right now.