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The Federal Reserve hiked its benchmark interest rate 11 times over the past few years to tamp down rampant inflation. The result has been a massive cooldown in inflation (the good news) but a significant increase in how much we all have to pay for mortgages , personal loans, and credit card interest (the bad news).
Thankfully, with inflation slowing down, the Fed now believes the economy can handle interest rate cuts and recently made its first one -- a large half-percentage point cut. So, how does this cut and any future ones change how much Americans will pay for a mortgage? Let's take a look.
Here's how much the average house price costs right now
To be clear, house prices aren't affected by rate cuts. Instead, the cuts affect the interest rate you pay for a mortgage, which can lower your monthly payments.
Mortgage rates are about 6.1% right now on average, which is down from about 6.5% at the end of August. The average-priced home is $412,300, so here's how the latest rate drop affects the monthly cost:
| Home Price | Interest Rate | Length of Loan | Down Payment
(10%) | Monthly Payment (Principal + Interest) |
|---|
| $412,300 | 6.1% | 30 years | $41,230 | $2,248 |
| $412,300 | 6.5% | 30 years | $41,230 | $2,346 |
Data source: Author's calculations using The Ascent's mortgage calculator.
In this scenario, an average-priced home costs about $98 less per month than it did approximately a month ago. That's not an earth-shattering amount of savings, but the good news for potential home buyers is that more interest rate cuts could be on the way.
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The Federal Reserve will meet in November and December and could potentially lower rates at each meeting. Better yet, some economists estimate that the Fed will continue to cut its benchmark rate throughout 2025. That could potentially bring mortgage rates down to 5.5% by the end of next year, according to a chief economist at Moody's.
If that happens, the monthly mortgage payment for the average-priced home could fall about $142 by the end of 2025 from what it is right now.
| Home Price | Interest Rate | Length of Loan | Down payment
(10%) | Monthly Payment (Principal + Interest) |
|---|
| $412,300 | 6.1% | 30 years | $41,230 | $2,248 |
| $412,300 | 5.5% | 30 years | $41,230 | $2,106 |
Data source: Author's calculations using The Ascent's mortgage calculator.
What affects your mortgage rate
While your mortgage rate is certainly affected by the Federal Reserve's decisions, you have some control over the rates you receive from banks.
These things have the biggest impact on your mortgage interest rate:
- Your credit score
- The price of the home
- How big your down payment is
- The state you live in
- How long the loan term is
- Whether you have a conventional, FHA, USDA, or VA loan
Let's look quickly at one of these factors: Your down payment. While there's no specific formula, lenders will usually give you a lower interest rate the larger your down payment is.
For example, if you buy a $400,000 home with a 5% down payment and a 7% interest rate, you'll pay $2,527 in principal and interest each month, plus $233 in private mortgage insurance (PMI). But if you put 20% down and receive a 6.5% rate, you could lower your payment to $2,023 per month and pay $0 in PMI, saving you $737 each month.
The current interest rate trend is encouraging if you're waiting on the sidelines of the housing market, like I am. If you can wait, it might be worth being patient to see if rates continue dropping. And while you're waiting, it pays to save up as much as possible so you'll have a larger down payment when you're ready to buy.
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