The Fed Rate Cuts Have Begun. Here's What They Mean for Your Mortgage

Well, it finally happened. The Federal Reserve has begun cutting the federal funds rate, which is the rate at which banks loan money to each other. It's the benchmark interest rate, and while it doesn't directly inform consumer interest rates, changes in it are reflected in rates on credit cards, personal loans, and home loans.

In the wake of rock-bottom mortgage rates during the COVID-19 pandemic, we've seen rates soar -- impacting successful buyers (who've had to pay more for a mortgage) and prospective buyers (many of whom have sat on the sidelines thanks to those higher rates) alike. Here's how lower rates could impact your current or future mortgage.

If you already have a mortgage: Refinancing potential

Did you buy a home in the last two years or so? If so, the odds are good that you got a mortgage rate over 6%. And that must have been disappointing if you know people who bought or refinanced at or around 3% in the handful of years prior.

It will likely be a while before we see rates that low again. But rates could fall to under 6% in the next year or so, based on predictions by mortgage experts. And depending on what your financial situation and credit were when you bought initially, that could represent a drop of 1 percentage point or more if you refinance your mortgage.

You might not expect 1 percentage point to make a huge difference in how much you'll pay per month, but it certainly can. Let's take a look at what you can expect to pay for principal and interest on a $300,000 mortgage at 7% vs. 6%:

Refinancing to a lower rate when it's feasible can make a big difference for your finances -- $196 extra per month in your budget could go to savings, investments, or other expenses.

If you don't yet have a mortgage: Perhaps a lower rate

Perhaps you've been sitting on the sidelines these last few years, getting ready to buy but not able to cover the cost of a mortgage at a higher rate. Lower rates on the horizon could benefit you, too.

Along with those higher mortgage rates, prospective buyers are also coping with higher home prices. The median price of an American home climbed during the COVID-19 pandemic period -- from $317,100 in Q2 2020 to a peak of $442,600 in Q4 2022, according to the Federal Reserve Bank of St. Louis.

The most recent data shows a median price of $412,300 in Q2 2024. Paying more for a home isn't ideal -- but getting a slightly lower mortgage rate could make that prospect a little more palatable.

How can you get ready?

Gearing up for lower mortgage rates? Good news -- there are a few ways to ensure your finances are in good shape for a refinance or a new mortgage.

• Polish your credit score: Getting your credit in the best shape possible ahead of applying with a mortgage lender is your best chance of saving money. Pay down existing debt, make all payments on time, and scour your credit report for errors.
• Shop around: Don't go with the first mortgage lender you talk to. Instead, apply with several to see which can offer you the best rate or the right mortgage program for you.
• Save money: If you're buying a home, you'll need to cover a down payment and closing costs (among other fees, such as those for inspection and appraisal). And if you're refinancing, you'll need to pay closing costs, too. Save money for them now, while you're waiting for rates to fall.

The impending arrival of lower mortgage rates could be a boon for you, whether you bought a home with a 7% mortgage or are trying to wade into the market. Ensure your credit is in good shape and pad your savings account while you wait.