Mortgage Rates Are Coming Down. When Does It Make Sense To Buy or Refinance? – Forbes Advisor

Borrowers are finally starting to see signs of hope.

Mortgage rates are at their lowest point in 18 months—and expected to fall further—after the Federal Reserve cut short-term interest rates by 0.50% or 50 basis points for the first time since the onset of the pandemic. One basis point is one one-hundredth of a percentage point.

If you’re debating whether to refinance or thinking about buying a home, this new environment presents a question: When should you act?

Be Patient With Rates

Don’t expect mortgage rates to fall dramatically after the Fed’s decision to cut the federal funds rate.

“The first rate cut has been baked in,” says Jessica Lautz, deputy chief economist at the National Association of Realtors (NAR).

Mortgage rates are influenced by 10-year Treasury yields rather than the federal funds rate. Bond traders have been expecting a lower rate environment for a while, which has resulted in 10-year yields dropping from roughly 5% in October 2023 to around 3.60% now.

Over the same period of time, the rate on a 30-year mortgage fell from 7.79% to 6.20%, according to Freddie Mac.

While mortgage rates are expected to continue to decline, they may not fall as fast in the near future.

When we look at the last 11 rate hikes set by the Fed and mortgage rate trends in the table below, the weekly average 30-year fixed mortgage rate saw minimal changes immediately following each meeting. The significant changes are seen over a longer time horizon.

Borrowing Costs May Not Drop Suddenly

That’s because the economy has remained relatively strong, growing at an inflation-adjusted annual rate of 3% in the second three months of the year, and is currently forecast by the Atlanta Fed’s GDPNow Tool to grow by 2.9% in the third quarter.

And inflation, which has decelerated in recent months, is still above the Fed’s 2% target. The Fed’s preferred inflation metric, the core personal personal consumption expenditures (PCE) price index, which strips out volatile food and energy prices, shows prices were 2.5% higher in July than a year prior.

The Fed, then, will be cautious as it lowers rates further.

Since 10-year Treasury yields tend to fall when the economy is expected to slow, it’s entirely possible mortgage rates will settle at a level well above where they were before the pandemic.

The Mortgage Bankers Association expects mortgage rates to level off at about 6.4% this year, 5.9% in 2025 and 5.5% by the end of 2026, compared to 3.70% at the end of 2019.

Improve Your Creditworthiness

In the meantime, buttress your credit score before you apply for a mortgage.

“You want to have your best credit score, your best scenario of income when you apply for a loan,” says San Francisco-based certified financial planner Sarah Behr.

It’s hard to take advantage of better rates if you’ve recently racked up credit card debt or experienced a job loss or lower income. Make sure you’re using a small proportion of your available limit on your credit cards and that you’ve been gainfully employed over the past two years, preferably with the same employer without interruption.

You’ll have difficulty receiving a loan if you’ve been out of work for more than six months in the preceding two years or if your overall debt level exceeds 36% of your income.

This could be a challenge for some since credit card debt now sits at a record $1.14 trillion, per the New York Fed, and the unemployment rate has jumped 0.7 percentage points over the past year to 4.2%.

Check these boxes before considering a new loan.

Refinance With Purpose

If you bought a home when mortgage rates were around 8% and have a clean financial record, you may be itching to refinance your mortgage.

But you don’t want to refinance just because rates are lower. The plurality of homebuyers in 2022, according to NAR, purchased a home with a rate between 5.5% and 6%.

Refinancing comes with closing costs typically from 2% to 6% of the loan. If you’ve got $500,000 left on your mortgage, that means you’ll owe somewhere between $10,000 and $30,000 in fees.

Make Sure the Rate Drop Is Worth It

Given the costs, you should put off a refinance until you can save 2 percentage points on your mortgage rate, says David DeVita, a wealth advisor at Girard, a Univest Wealth Division.

With tens of thousands of dollars in fees, you don’t want to find yourself refinancing every few years, especially if you just closed on the house a few years earlier.

“You need to get into the math,” says DeVita. “If you’re only saving a couple hundreds of dollars a month, let’s find something else in your budget that you can cut.”

Read More: Use a mortgage refinance calculator to see how much you’ll save

Your goal, says Behr, is to knock off enough from your monthly payment to cover your refinance fee within a year or so.

Act Now If You’re Struggling

The trade-off in waiting for a lower interest rate, though, is dealing with higher interest payments now.

While it’s ideal to wait for lower rates, you may want to pull the trigger more quickly if you overextended yourself to purchase your current home.

“If you’re struggling financially, where you are in the range where it’ll make a significant difference to your monthly cash flow, then it’s something to consider now,” says DeVita.

If you can’t afford the upfront costs, your lender will let you add it to your new loan. But that just adds to the amount you’ll owe.

Don’t Hold Out for the Perfect Home

The past few years have been the worst time to buy a home in at least the past 15 years, according to the Atlanta Fed’s Home Ownership Affordability Monitor.

The index looks at housing conditions, such as average prices and interest rates, and creates an index with an affordability threshold of 100. Anything higher than that tells buyers that homes are broadly affordable, while a lower reading signifies the market is frothy.

The average reading in 2023 was 71.9 and 70.9 in the first half of 2024. To put that in perspective, the reading was 73.7 in 2006.

In 2019, the last full year before the pandemic, it was 105.2.

The good news is that conditions are starting to improve.

The median sales price on homes sold was $412,300 in the second quarter of 2024, which is roughly $25,000 lower than two years ago. Mortgage rates are coming down, and the supply of homes for sales has ticked up in recent months, according to NAR.

If you’re looking for a new home, you don’t want to wait to make a bid just because mortgage rates may fall in the months to come.

Look for Incentives

Builders in housing developments can offer incentives in terms of lower prices or reduced financing costs if you use their preferred lender, Behr says.

This can take the form of credits that lower closing costs when you finalize your mortgage or a lower interest rate for a set period of time, such as two years.
You can use the savings on closing costs today toward refinancing fees when you ultimately go to apply for a lower rate.

Get Multiple Quotes

Mortgage originations declined by 6.8% in the first quarter of the year, according to data firm ATTOM, and have declined in 11 of the last 12 quarters to their lowest level in 24 years.

Since demand has been low, potential buyers have a good opportunity to make lenders compete against themselves for your business.

“You need to shop for your mortgage,” says Phoenix-area CFP Raman Singh.

Once you have a good quote, contact your other potential lenders to see if you can get a better deal.

Avoid a Bidding War

If your finances are lined up, and you’ve found a house you like, put in an offer soon.

With interest rates set to decline over the next few years, the demand for homes could rise, thereby causing prices to rise.

“If you want to buy a house and you wait until rates come next spring, there could be pent-up demand—and then you’re back into bidding wars,” says Behr. “You can buy a house now and plan to refinance in two years as long as you’re not overextending yourself.”

Will There Be More Rate Cuts in 2024?

While there’s no October FOMC rate-decision meeting, experts predict more rate cuts in November and December. What’s more, those experts also expect more rate cuts as we move into 2025. This makes for a crucial time to keep an eye on the market as a home buyer or homeowner looking to purchase or refinance.

At this point, it’s unclear what future rate cuts may look like, but Goldman Sachs analysts are forecasting another 25 basis point rate cut in both November and December.