A week before the Federal Reserve is anticipated to announce a rate cut, in early September, the 30-year mortgage rate dropped to its lowest level in a year.
According to analysts, mortgage rates are unlikely to decrease following the upcoming Federal Reserve meeting, when the central bank is anticipated to lower interest rates.
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Instead, homeowners and those wishing to purchase or refinance should move quickly to secure a favorable rate while interest rates are still declining.
Due to data indicating a worsening labor market, mortgage rates have plummeted in recent weeks. Unemployment claims jumped to a four-year high on Thursday, which only served to heighten worries.
The Federal Reserve is prepared to lower interest rates at its meeting on September 16–17, as the economy seems to be deteriorating. In an effort to boost the economy, the central bank is anticipated to lower the federal-funds rate by 25 basis points the following week.
However, it is anticipated that all of the action on mortgage rates will have occurred before Fed Chair Jerome Powell’s speech are finished.
“A common misconception among families is that the 30-year mortgage rate follows the Fed’s short-term rate choices exactly. They frequently come to the conclusion that waiting will result in a cheaper mortgage rate because they anticipate a Fed cut,” Yale School of Management finance professor Kelly Shue told MarketWatch. “This reasoning is flawed.”
“Consumers have already benefited from the drop in mortgage rates,” said Danielle Hale, chief economist at Realtor.com, in a statement ahead of the potential Fed cut.
“After the Fed meeting, however, I expect that mortgage rates are more likely to steady or even edge higher,” she noted, although she still expects this decline to last until the meeting.
This is the reason.
The Fed’s actions are not immediately reflected in mortgage rates.
The Fed’s interest-rate policy has no direct bearing on mortgage rates.
The yield on the 10-year Treasury note, which declines when investors anticipate instability in the U.S. economy, is closely correlated with the 30-year mortgage rate.
There are several meanings for turbulence. Financial markets fear that the Fed will raise interest rates if inflation gets out of control and consumer prices increase too rapidly. The 10-year and consequently the mortgage rates would rise as a result. Markets are also concerned about jobs. The Fed may lower interest rates in an effort to fulfill its objective of promoting full employment if the number of unemployed individuals increases. The 10-year and 30-year are pushed lower as a result.
For example, following the announcement of jobless-claims statistics on Thursday morning, the 10-year dipped just below 4%. According to Freddie Mac, that decline in turn caused the 30-year mortgage rate to drop to 6.35% on Thursday, the lowest level since October 2024.
Chen Zhao, head of economics research at Redfin, recently told MarketWatch that other issues that concern markets include the Fed’s ability to maintain its political independence and the amount of government expenditure, both of which have an impact on interest rates.
Selma Hepp, chief economist at Cotality, told MarketWatch that as the government takes on more debt, it will issue more bonds to pay for it, which drives up mortgage rates.
Additionally, in a recent MarketWatch column, Simon Johnson, a former member of the Fannie Mae board, stated that “firing the chair of the Fed or any combination of governors, or taking any other extraordinary political measures, is likely to raise long-term interest rates and make it more expensive to buy homes.”
Financial markets may be let down if the central bank reduces more slowly than expected because they now have “high expectations for the Fed’s upcoming rate cuts,” according to Hale of Realtor.com.
Mortgage rates may rise if investors are disappointed with the Fed’s projected rate-cutting pace, which is contingent on the central bank’s statement at its meeting next week.
Reversing course, the Fed could still directly affect mortgage rates by purchasing mortgage-backed securities, or MBS, as it did when it attempted to loosen monetary policy to boost the economy during the epidemic.
“Almost immediately,” according to a recent MarketWatch story, the 30-year rate may drop by as much as 40 basis points if the Fed resumes purchasing mortgage debt. However, since 2022, the Fed has begun reducing its balance sheet. Therefore, Hepp stated, “You don’t have this buyer that will buy [mortgage bonds] no matter what,” in the present day.
Do you want to wait for reduced rates or jump in now?
The key question for homeowners and homebuyers wishing to refinance an existing mortgage or take out a new one is: Should you act now or wait?
As stated by Michael Cocco, a certified financial planner with Beacon Wealth Partners in partnership with Equitable Advisors, “it’s a good idea to do a ‘rate lock’ now with a lender, before the Fed takes action,” MarketWatch said.
“If the Fed’s actions cause the 10-year (and thus mortgage rates) to decrease, then the consumer can reach out to another lender to lock in a lower rate,” he stated.
In spite of the recent decline, many homeowners have already locked in a rate. Rate-and-term refinance rate locks increased 70% in August compared to the previous month due to the rate decline, according to data from mortgage technology provider Optimal Blue.
Mike Vough, Optimal Blue’s president of corporate strategy, said in a statement, “Borrowers are reacting swiftly to rate increases, driving the strongest month for rate-and-term refinances we’ve seen this year.”
According to Cocco, some lenders also provide a feature known as a float-down option, which enables borrowers who have locked in a rate to reduce it if market rates fall further more before the loan closes.
“These have become more popular so lenders do not lose the business in the middle of a deal, from people changing lenders to get a better rate,” Cocco stated. “Most lenders do not charge a fee to lock a rate or even to institute a ‘float down’ option.”
According to Hepp of Cotality, the majority of projections she has seen do not anticipate the 30-year to fall below 6%, not even in 2026.
However, such a scenario would be possible if the job market deteriorates considerably and inflation decreases, according to Zhao of Redfin.
In addition to visiting traditional banks, Cocco advised homeowners and prospective homebuyers to evaluate mortgage brokers. “Brokers use multiple lenders to source the best product and best rate for your personal situation, and may have programs that can be flexible in rates,” he said, “to allow you to lock in the best possible rate at time of closing.”
