First, let’s look at WHAT the rate cut means to mortgage rates. The rate that the Federal Reserve “controls” is the Fed Funds Rate. This is the interest rate that banks charge each other for lending money between themselves to stay above the minimum dollar amount they must keep in reserve according to the Federal Reserve requirement. While this rate may have many ripple effects onto other rates, it is not directly tied to the mortgage rates that consumers will receive. Mortgage rates more closely track the yield on a 10-year Treasury bond (see chart below). If you follow the yield on the bond’s movement, you will get a more accurate picture of the direction of mortgage rates.
Articles |
Sep 26, 2024
Mortgage Rates and the Recent Fed Rate Cut
What does the recent Federal Reserve interest rate cut mean for mortgage rates?
With the news on September 18th that the Federal Reserve is cutting interest rates by half a percentage point, many people who purchased a home in recent years are excited for what this may mean for possible refinancing opportunities. Since we have been having this conversation with clients more frequently, I wanted to discuss what the rate cut means for mortgage rates, how mortgage rates have been reacting to the news of the Fed rate cut, and reviewing when you should consider refinancing a mortgage.
While we understand that rising mortgage rates can have a very direct impact on monthly cashflow and your ability to save for the future, I think it is still important to recognize where rates are historically. Since 1971, the weekly average mortgage rate is 7.76% (see chart below). It can be easy to forget that current interest rates are below that mark, since the weekly average mortgage rate has been 4.99% since 2000 due to the lows during COVID.
Now, let’s look at HOW mortgage rates have been reacting to the news of the rate cut. For this we will not only need to look at what rates have done since the Fed announcement, but also the time leading up to it. The chart below from the St. Louis Fed shows mortgage rates from October 1st of 2023 to September 19th of 2024. Mortgage rates hit a high of 7.79% on October 26, 2023.
Since the high shown above, you will see that rates have steadily come down with a couple of slight bumps back up. Since the Fed had been talking about rate cuts for an extended period, it was assumed that cuts were going to happen unless they could not lower rates due to other economic factors. This is why mortgage rates did not fall immediately after the announcement by the Fed. In fact, there was a very small rise in mortgage rates directly after the announcement. The movement of the rate cut had already been priced into the mortgage rates leading up to the announcement. With that being said, the Federal Reserve signaled that more rate cuts could be coming. We would expect that this will continue to lead to gradually declining interest rates.
Finally, let’s look at WHEN you should look to refinance. As with most things financial related, the answer to “Should I refinance?” is “It depends”. Having a lower interest rate, and therefore a lower monthly payment, can be attractive but there are many factors to consider outside of just the interest rate. Some of these factors include:
- How much will it cost to refinance?
- According to Bankrate.com, the average cost to refinance is between 2 to 5 percent of the new loan amount. This amount takes away from the overall potential interest savings.
- Did you purchase any points on your previous loan to permanently buy down the rate? (Read more about buying down mortgage rates here.)
- If you purchased points on your previous loan, those do not move over to the new loan. Therefore, that was an expense that you potentially did not get value out of and negates some savings.
- Did you do any temporary buy downs to your current mortgage rate and what happens to that cost?
- Have you made additional principal payments to your current mortgage?
- Making additional principal payments, especially early in the loan, has a dramatic effect on overall interest paid and shortening the term of your mortgage loan.
- Do you currently pay "Private Mortgage Insurance" and how will that translate to your new loan?
These are just some of the factors to consider. At CWM, we not only have tools to help determine the financial benefits or implications around when refinancing may make sense, we have conversations around the psychological impacts as well. In some cases, the overall savings may not add up but the psychology of having a lower mortgage payment is attractive. We help coach our clients through this discussion with their overall financial plan in mind.
If you are interested in a more robust conversation regarding refinancing and your specific situation, please Contact Us or call the office at (425) 778-6160 to schedule an appointment with your CWM advisor.
This material is not intended to replace the advice of a licensed real estate agent or mortgage broker. Consultation with the appropriate professional should be done before any financial commitment regarding the issues related to the situation are made.
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