Mortgage rates came down, but aren't heading as low as you might remember

Homebuyers who are hoping that mortgage rates ultimately tumble to a 3% to 4% range after a much-anticipated string of Fed rate cuts in the upcoming months are likely to be sadly disappointed.

While many economists and others say there's room for the 30-year mortgage rate to drop a bit more next year, they're not forecasting a return to ultra-low pandemic level rates.

The 30-year fixed rate mortgage averaged 6.09% as of Sept. 19, according to data from Freddie Mac's latest primary mortgage market survey.

It's quite a drop from an average of 7.19% a year ago and the 7.79% spike back in late October 2023. The 30-year average's highest point so far in 2024 was 7.22% in early May.

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Mortgage rates unlikely to return to ultra-lows

But we're a long way from where we were three years ago for the week ending Sept. 23, 2021, when the average was 2.88% with 0.7 points, which is 0.7% of your total loan amount upfront to the lender. Average fees and points have not been reported as part of the survey since late 2022. The Freddie Mac survey is focused on conventional home purchase loans for borrowers who put 20% down and have excellent credit.

Rates aren't likely to tumble much from here soon.

"I expect the fixed rate to be near 6% at the end of this year," said Mark Zandi, chief economist for Moody's, "and closer to 5.5% by the end of next year. Long run, it should settle between 5.5% and 6%."

Zandi said his mortgage forecast reflects expectations that the Fed will aggressively cut the federal funds rate through the end of 2025 to get the short-term federal funds rate closer to 3%.

The Federal Reserve cut rates by a good chunk — a half point rate cut — on Sept. 18 to bring the short-term federal funds rate to a range of 4.75% to 5%. It was the first rate cut since the Fed raised rates 11 times from March 2022 through July 2023 to cool down skyrocketing inflation.

"My best guess is that the average 30-year fixed mortgage rate will be around 5.5% a year from now," said Ted Rossman, senior industry analyst for CreditCards.com and Bankrate.com.

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Many factors — the health of the U.S. economy, the jobs market, the Fed's rate-cutting path, and more — will influence mortgage rates ahead, so rates can be hard to forecast.

A key point to consider: Mortgage rates can fluctuate even at times when the Fed is holding rates steady, consider the spike last October when rates soared to the highest level in more than 23 years on continued inflation fears.

Sharply lower rates also can hit when the outlook for the economy is at its worst.

What kind of mortgage rates are homebuyers seeing?

Alex Elezaj, chief strategy officer for Pontiac-based UWM, said many mortgages are being made in the 5.5% to 5.75% range currently, which is below the 6.09% average rate that's often quoted. United Wholesale Mortgage expects to be very busy in the last quarter of this year into next year.

Homeowners who have a mortgage at 6.5%, 7% or 7.5% may be able to save money today by refinancing now, depending on their situation, he said. He recommends MortgageMatchup.com powered by UWM to find a broker or run numbers through some calculators.

Others may want to hold onto a mortgage in the 3% range, he said, but still want to take advantage of lower rates now to tap into the equity in their homes to cover high-cost bills.

He noted that the average homeowner in the U.S. gained about $28,000 in equity in the past year. The figure reflects price changes year over year through the first quarter, according to CoreLogic. Michigan homeowners on average gained $20,000 in equity. California saw the largest average equity gain in the country at $64,000. High home prices in many markets with high demand drove up averages.

"What the Fed rate announcement drives is people to really look at their current situation and figure out if there are options that work for them," said Elezaj, who is "cautiously optimistic" about the economic outlook.

Any action that the Federal Reserve takes regarding short-term rates has a direct impact on credit cards and home equity lines of credit, which can improve one's financial picture.

Mortgage rates do not follow Fed rate cuts as directly. Instead, mortgage rates track the market for 10-year Treasury bonds, and the bond market has already baked in some more Fed rate cuts ahead.

"The more that the Fed looks at reducing rates," Elezaj said, "the more that we would foresee that mortgage rates will also come down."

Some variables will be key to watch in the months ahead.

"If jobs data comes in weaker than expected, that could be a catalyst for (mortgage) rates falling," Bankrate.com's Rossman said. "On the flip side, rates could move higher if the political winds blow in favor of more borrowing and higher deficits. Or if inflation proves stickier than anticipated."

If, for example, you took out a mortgage at nearly 8% roughly a year ago, Rossman said, you might consider refinancing at around 6% or so. On a $300,000 loan, Rossman said, it costs $364 less per month for your payments on principal and interest if you're borrowing at 6.2% versus 8%.

But Zandi said it is not a good time currently for many homeowners to refinance, especially when the average rate across all existing mortgages is close to 4%. A good rule of thumb is to refi, Zandi said, when a new mortgage rate is at least 2 percentage points below your existing rate and you plan to remain in your home for at least a few years.

First-time homebuyers see some relief

Some first-time homebuyers might find an opening here, though. Much will depend on whether they're able to afford the property taxes, whether they qualify for low rates, how much savings they've built to cover repairs and how long they want to live in that home.

And do you feel secure in your job? Or confident in your ability to find another well-paying job?

While the overall U.S. economy continues to expand, signs of a slowdown are taking place. The latest Freddie Mac economic forecast says the current trend is "consistent with a soft landing." The report noted that the "labor market is cooling with unemployment up and job growth moderating."

Chris Sbonek, mortgage broker and owner of Mitten Mortgage Lending in Wyandotte, said the Fed's big first rate cut announcement led to "a lot more phone calls, a lot more texts, a lot more emails." It's a 50-50 mix so far, he said, between potential homebuyers and homeowners looking to refinance to a lower rate.

Some potential buyers got pre-approved for a mortgage during the last year to 18 months, but they then got burned out and stopped looking. Now, they're more interested in resuming a search, thanks to lower rates.

One's ability to get a low rate will depend heavily on one's credit score. "Credit is as, or more, important than it has ever been before," he said.

Borrowers with good credit, he said, are seeing average rates in the mid- to low-6% range based on the 10 different lenders he works with generally. With some UWM programs, he said, some borrowers have been able to lock in rates in the high 5% range.

"Everyone is not walking away with a 5-something right now," Sbonek said, "but we do have borrowers, ones with the really good equity, ones with really good credit, sliding into the high 5 percents right now."

Sbonek noted that rates had trended down in recent weeks as the markets anticipated a rate cut and then edged somewhat upward after it.

Those with higher credit scores typically qualify for lower rates than those with low credit scores. Other factors come into play, too, such as the size of your down payment and how much of your monthly income already goes toward paying your debt each month. Experts say less-qualified borrowers, including those with good but not excellent credit scores, could end up looking at mortgage rates that run into 6.5% to edging up to nearly 7%.

Someone with fair credit, say a credit score between 580 to 669, could see an average mortgage rate now around 6.75%, said Jeff DerGurahian, chief investment officer and head economist for loanDepot.

Some consumers with scores in the fair range can be viewed by some lenders as having unfavorable credit, and could see credit applications declined, according to Experian. But other lenders could offer options, often at higher costs.

"Lower rates should help first-time homebuyers engage the market a little better," said Keith Gumbinger, a vice president at HSH.com, a mortgage information website.

Someone with a slightly lower income level could even have a better chance at qualifying when their monthly payments are lower, thanks to the latest drop in mortgage rates.

For example, he said, consider someone buying a median-priced home in metro Detroit for $280,700.

At a 6% mortgage rate, he estimated that the homebuyer would likely need an income of $72,665 or higher to qualify. If rates were at 7%, he said, the borrower would need an income of about $78,993 to qualify. That's assuming the buyer had a 20% down payment.

At 6% with only a 10% down payment — probably more realistic for a first-time homebuyer — the buyer would need an income of around $83,306 to qualify for that mortgage, he said.

In this example, the loan amount with a 10% down payment would be $252,630. And he noted that there are costs for PMI, or the required private mortgage insurance, as well, which raises the income needed to qualify.

"Affordability — the intersection of price and financing costs relative to incomes — is what's keeping home sales from improving much," Gumbinger said.

"But perhaps the biggest roadblock is a lack of desirable, affordable homes available to buy. Yes, inventory levels are said to be improving, but the market doesn't just need more inventory."

The right kind of inventory is needed, he said, for home sales to improve. Seeing more higher-end luxury homes up for sale won't help boost sales overall, he said, if buyers remain on the sidelines because more starter-size homes are needed in a community.

Potential homebuyers, typically, he said, should not try to time the market and wait to see if they can snag a lower rate.

"There are no guarantees that more favorable conditions will come or will come at a time when you can take advantage of them," Gumbinger said.

Contact personal finance columnist Susan Tompor: stompor@freepress.com . Follow her on X (Twitter) @ tompor .

This article originally appeared on Detroit Free Press: Mortgage rates came down, but aren't heading as low as you might remember