Mortgage rates just fell again. Here’s what you need to know.

The 30-year fixed-mortgage rate is at its lowest since spring 2023, amid rising expectations that the Federal Reserve will trim interest rates.

By Scott Sowers

September 12, 2024 at 12:00 p.m. EDT

Mortgage rates fell on Thursday to their lowest level since April 2023 — 6.2 percentfor a 30-year fixed-rate mortgage, down from 6.35 percent a week before, according to Freddie Mac.

That’s a sharp drop from the high of 7.8 percent recorded last October and welcome news for would-be home buyers who have been priced out of the property market, as well as homeowners who bought at high rates and are eager to refinance. It also comes as the Federal Reserve gets ready for its next policy meeting next week, when it is expected to announce the first interest-rate cut since it began hiking rates in March 2022 to combat spiraling inflation.

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Here’s what you need to know about where mortgage rates are heading.

Why are mortgage rates falling?

The Fed’s anti-inflation campaign pushed its benchmark rate from just above zero to over 5 percent, where it has stayed since summer 2023. While high rates ultimately tamed inflation, they also made borrowing much more expensive, from car loans to mortgages.

The Fed has emphasized that it will keep rates high until inflation is contained — and recent data is pointing that way. The consumer price index in August clocked in at 2.5 percent — the lowest level in more than three years and a sizable drop from the 2.9 percent increase in July. After striking a more cautious note following several hotter-than-expected inflation readings early this year, Federal Reserve Chair Jerome H. Powell finally signaled in late August that a rate cut would be coming at the September meeting.

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Fed watchers now see at least two rate cuts before the end of the year, but some are betting on three, with more to come in the spring. Some economists say the benchmark rate could be as low as 3 to 3.5 percent by the second half of 2025.

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Lower inflation is cutting borrowing costs across the board. What matters most for mortgage rates, though, is 10-year Treasury yields — a baseline that markets use to assess the risk of other investments. After hitting a peak of 4.98 percent last October, they are now down to 3.69 percent, and this drop is helping drive mortgage rates lower.

“As inflation has moderated, both long-term bond yields and mortgage rates have come down,” explained Greg McBride, chief financial analyst at Bankrate. “Mortgage rates move in relation to longer-term interest rates, such as the 10-year Treasury yield, rather than the short-term interest rate set by the Fed.”

How much more are mortgage rates expected to drop?

While Fed rate cuts are expected over the next year, the change in mortgage rates could be less dramatic because they have already fallen to price in those expectations, analysts say.

“Most of the declines have already occurred,” said Lawrence Yun, NAR chief economist and SVP of research for the National Association of Realtors. “[The fixed-rate 30-year rate] could go down to 6 percent by the year’s end, but that will be about it.”

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“The long-term rates incorporate potential future inflation, economic strength and many other factors,” he added. “One big factor is what the Fed is likely to do in September and in future months. So in anticipation of the future rate cuts, the mortgage rates are already adjusted.”

That said, if the United States does fall into a recession — a scenario now considered unlikely — the Fed would be compelled to cut rates more aggressively, which in turn could push mortgage rates down along with everything else, McBride said, adding: “Be careful what you wish for.”

However, if inflation keeps cooling without the economy falling into a recession, “then mortgage rates may not fall much below 6 percent,” he said.

If I hold a mortgage, when does it make sense to refinance?

Refinancing is a question of math with a side order of gambling tossed in. In most cases, it doesn’t make sense to refinance a mortgage until the rate has dropped a full percentage point below your current rate. Once that happens, you can compare the amount your mortgage payment will drop against the closing costs you’ll have to pay to refinance. Those typically amount to 2 to 5 percent of the loan value and cover the refinancing application, origination and home appraisal fees.

Deciding on refinancing requires figuring out when the long-term savings you get from the lower mortgage rate will add up to offset the closing costs.

Usually, it makes sense to refinance if you intend to hold the mortgage for the long run. But the gambling comes into play when locking in your rate for the refinancing. Mortgage rates, including for refinancing, fluctuate daily and correspond with major economic events, like an inflation report. So you don’t know exactly what the rate will be until the day of the refinancing itself.

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What do falling mortgage rates mean for the housing market?

High rates and high prices have converged in recent years to create a housing affordability crisis in the United States. One result has been plummeting sales. According to the National Association of Realtors, existing-home sales totaled 4,090,000 in 2023, down from 6,120,000 in 2021.

Housing starts, meaning new homes under construction, have also been falling over the past four years, while high rates have made those homeowners with relatively cheap mortgages reluctant to sell. Those forces have tightened inventory further and worsened the supply crunch.

Now that the Fed’s benchmark rate is set to fall, the cost of capital goes down for everybody. Real estate developers can borrow more money to build homes. And as inflation flattens and mortgage rates drop, more consumers can afford to buy homes.

But McBride points out a catch: Low rates help affordability, but only if there’s enough supply to meet the demand.

“If mortgage rates plunged, we could see a surge in demand that swamps the supply of homes for sale, pushing home prices up enough to offset much of the benefit of lower mortgage rates,” he said.

On the flip side of the equation, housing supply could get a boost from owners currently marooned in their existing homes that were bought when mortgage rates were cheap. They could get back in the game as rates edge down and be motivated to sell, with the hope of buying a new home at a more affordable rate, Yun said.

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