What the Fed rate cut means for mortgage rates

For the second time in three months The Federal Reserve issued a cut in its federal funds rate on Thursday. Now in a range between 4.50% and 4.75%, the interest rate has fallen 75 basis points from where it was on 1 September. And if inflation continues to fall, it could fall even more when the Fed meets again in December for its final meeting of 2024. Although that’s not good news for savers who have been accustomed to high prices on select savings accountsthis is generally welcome news for borrowers who have had to pay more for mortgage loans, credit cards etc.

Interest on mortgage loansespecially rose last year to theirs highest level since 2000 but has since coincided with inflation. But it’s been a bumpy ride back to bottom in recent weeks. What does this latest Fed rate cut mean for mortgage rates? That’s what we’ll break down below.

See which mortgage interest rate you are currently eligible for here.

What the Fed rate cut means for mortgage rates

In short, Thursday’s rate cut, however welcome, is unlikely to do much for mortgage rates. Here’s why:

It was only a cut of 25 basis points

in front September’s larger-than-expected cut of 50 basis points, mortgage interest rates fell to a two-year low. That gave homebuyers ready to trade and some homeowners who wanted to refinance a window of opportunity to realize some savings opportunities. But this week’s cut was just 25 basis points. It is certainly a step in the right direction, but not significant enough to result in a huge reduction in mortgage rates. And since lenders take several factors into account for their home loan rate quotes – not just the federal funds rate – it’s unlikely that mortgage rates will even drop by the same percentage amount that the federal funds rate just did.

See what mortgage rates are available now that the Fed has cut rates again.

It was priced by lenders

Homebuyers who checked mortgage rates on Monday this week and then checked them again after the Fed meeting may have been surprised to see the same or a slightly changed rate quote. That’s probably because today’s cut was already preemptively priced by lenders in anticipation. This often happens as lenders monitor the market and make appropriate adjustments to their rates. That is why you should check mortgage rates daily for an opportunity to take advantage of a below-average interest rate.

Other factors offset these cuts

There was no Federal Reserve meeting in October. And yet, mortgage rates rose by more than a point a month. Why is that? It’s because other factors affect mortgage interest rates in addition to just what the Fed does (or doesn’t do). And some of these other factors, such as unemployment and inflation interest rate, can and often will offset the formal rate cuts issued by the Fed. The 10-year government yield also plays a decisive role in the direction mortgage interest rates follow. So while a Fed rate cut will theoretically help lower mortgage rates, it’s often a much more complicated set of factors that push rates up.

Bottom line

A Fed rate cut is only part of the calculation for borrowers who want to secure a low mortgage rate. It is noted that waiting for an ideal time to buy comes with its own set complications. So in today’s market it may be worth buying now, especially if you find yours dream homeand refinancing at a time when rates have finally fallen to a level you are comfortable with.

Learn more about your current home buying options online.