Home Buying Tips
Lessons From a First-Time Home Buyer: What Fed Rate Cuts Could Mean for Home Buyers and Owners
Yesterday, for the first time since 2020, the Federal Reserve cut interest rates. In fact, to the surprise of some observers, the rate was cut by half a point (as opposed to the quarter point that was widely anticipated). For many people, this update might not mean much — but, for those who have been looking to buy a home or who purchased during recent rate highs, this could be impactful news.
Fed Rate Cuts and Homebuyers: The Good News and Bad News
Better rates for buyers… eventually
If you’ve been looking to buy a house in the past few years, there’s a good chance that the high interest rates have dissuaded you. After all, while a 4% mortgage interest rate would put payments on a $300,000 home at around $1,400 (not including taxes or insurance), those monthly payments become nearly $2,000 with a 7% mortgage interest rate. With that in mind, any downward movement in these rates is welcomed news for prospective buyers.
The bad news is that, in recent months, average mortgage rates have already been adjusted lower in anticipation of a cut. However, since many were expecting a quarter-point cut, rates will hopefully continue to fall. Alas, it could take some time for this to happen.
Still, with the first cut (which may or may not be the deepest) out of the way, it does seem likely that mortgage rates will continue to trend downward in the months ahead. While we won’t suddenly go back to the 3% rates of 2020, hopefully these reductions will help make homeownership more attainable for those who have been holding out.
Is refinancing worth it?
When we purchased our home, it was pretty much a peak in terms of interest rates. What exactly is our mortgage interest rate? That’d be 7.999%. Ouch.
Because of this, we’ve been not-to-secretly hoping for a rate cut to come along so we might be able to refinance our mortgage into something a bit lower. Yet, it’s not quite clear whether this rate cut will get us to where we need to be. What I mean by that is, unfortunately, there are costs associated with refinancing. Because of this, we’ll need to save a certain amount of money per month on our payments at a lower rate in order to make it worth it.
Since we worked with a mortgage broker, we already have him monitoring rates for us and he’ll let us know when the time comes for us to refinance. I’m very much looking forward to that day — but we did make sure that we could afford our current payments before buying as there was no guarantee when rates would go down (if ever, for that matter).
Again, while this week’s news may be encouraging for those like us who have been eyeing refinancing, some more patience may be required for now.
In the meantime
Finally, let’s talk about savings accounts. Unlike mortgage rates, banks tend to slash the interest they pay to customers pretty much immediately after the Fed’s decision is announced. This, in turn, could impact those who are saving up for a down payment and have been able to build their fund via relatively solid APYs in recent years.
In this case, while earning an extra 0.5% APY on your savings would be nice, this cut is unlikely to make or break you. But, if you are looking to get the most interest you can, you might still be able to find a certificate of deposit (CD) with 5% APY or thereabout — although these will surely be adjusted shortly if they haven’t already. Just keep in mind that putting money in a CD basically means locking it away for a certain amount of time and that fees may apply if you need to pull it out early.
A better alternative might be online bank accounts. Although the savings rates will likely drop they typically offer far higher APYs than traditional banks and don’t have the same time commitments and/or penalties associated with CDs. We’ll be exploring these more in the future on Fioney and keep up to date APYs so you can take advantage of the best rates.
The Federal Reserve’s aggressive interest rate cut is something investors and economists have been looking forward to for a long, long time. Now that it’s finally here, homebuyers and homeowners might be about ready to pop the champagne. But, before you do, it’s important to understand that the mortgage rates and housing markets are a bit more complex than savings accounts and credit card interest rates. Therefore, you might you need to wait a bit longer to get that rate you’ve been eyeing.
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