When Could Fed Rate Cuts Move the Needle on Mortgages?

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The Fed's recent half-a-percentage-point rate cut will ideally be good news for the U.S. economy and your personal finances. But will the Fed's rate cut help reduce the cost of mortgages ?

Many Americans who would love to buy a home have been frustrated by a "frozen" housing market for the past two years, with rising interest rates, high home prices, and limited supply of housing for sale.

Lower mortgage rates could help make life easier for home buyers. But will it happen? We talked with mortgage expert Phil Crescenzo Jr., vice president, Southeast Division at Nation One Mortgage Corporation, to get some perspective from inside the mortgage industry.

Here are a few high-level insights on what home buyers might expect to see next from mortgage rates after Fed rate cuts.

The Fed's recent rate cut won't directly change mortgage rates

Here's a frequently misunderstood fact about mortgage rates: the Fed doesn't control mortgage rates. The Fed's rate cuts (or hikes) are to the federal funds rate, which is a short-term interest rate and the rate at which banks borrow from each other.

But mortgage rates are tied to the 10-year Treasury yield, which is a different interest rate. And although the 10-year Treasury yield can be affected by Fed rate cuts, it's not directly controlled or decided by the Fed.

"The fed funds rate and its impact on long-term interest rates are often misunderstood, as they are not in lockstep," said Phil Crescenzo, Jr., VP, Southeast Division at Nation One Mortgage Corporation . "However, they do have an overall impact on one another. There are other factors, such as job growth, unemployment, and, of course, inflation, still at the forefront weighing in. Sometimes, the overall negative factors do weigh in on positive interest rates, with unemployment being one of them."

The Fed's Sept. 18 rate cut is not likely to lead to massive changes in mortgage rates. Mortgage rates have already declined significantly in the past year as bond market investors have bet on Fed rate cuts. For mortgage rates to decrease further, the Fed would likely have to cut its federal funds rate even more.

The Fed might keep cutting rates

Good news for mortgage borrowers and prospective home buyers: The Fed's Sept. 18 rate cut was likely the first of many. The Fed's forecast has called for an additional half-a-percentage-point of rate cuts by the end of 2024, and another 1 percentage point of cuts in 2025. If the Fed pursues more aggressive rate cuts, this could help drive mortgage rates lower.

"The Fed cut has not impacted long-term interest rates and would have to be more aggressive to have a long-term impact," said Crescenzo, Jr. "Considering there were such significant rate increases since 2022, with total rate hikes of 5%, we have a ways to go to create a more favorable market."

How far could mortgage rates fall in 2025?

No one knows for sure if the Fed will keep cutting interest rates, or by how much. New economic data could come out that makes the Fed pause, or cut its rate by smaller amounts than expected. And no one can perfectly predict the future of the mortgage market, or its impact on housing prices.

Cheaper mortgages might not lead to cheaper housing. Instead, lower mortgage rates might spur more buyers to enter the market and compete for housing, driving prices up even more.

But Crescenzo, Jr. is hopeful that America's housing market might not be too far away from getting "unfrozen." As of Sept. 19, 2024, the average 30-year fixed-rate mortgage was 6.09%. If mortgage rates fall by another 0.30%-0.34% in 2025, Crescenzo, Jr. believes this level could help get more home buyers off the sidelines and stimulate the housing market -- and it might not take drastic rate cuts from the Fed to accomplish this.

"As we look ahead to 2025, I think there might be another 0.50% to 0.75% decrease in fixed interest rates by the Fed, and that having mortgage rates in the upper 5.75% range would be enough to keep activity increasing," Crescenzo, Jr. said. "This could allow more home buyers to enter the market."

Who should refinance now?

The usual rule of thumb in mortgage refinancing is that it makes sense to refinance your mortgage if you can lower your rate by 1 percentage point or more. If you bought a home in 2022 or 2023 with a mortgage rate of 7% or higher, right now might be a good time to refinance.

"Any clients that have purchased homes within the last 24 months could be good candidates for refinancing," Crescenzo, Jr. said. "Just a few months ago, rates were still over 7%, and those buyers could see close to a full 1% in reduction. But most likely, buyers and homeowners that closed prior to the past 24 months would not see enough benefit of refinancing yet."

Don't assume that right now is your "only chance" to refinance your mortgage or buy a home. Mortgage rates might keep declining by the end of 2024 and into 2025.

Bottom line

The Fed's half-a-percentage-point rate cut in September 2024 probably won't make mortgage rates cheaper. But more Fed rate cuts (and further reductions in mortgage rates) are likely to come in the months ahead. 2025 could be a good year for mortgage refinancing and home purchase loans.

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