Will mortgage rates keep going down? The next Fed meeting could answer

Mortgage rates continued to fall this week as the housing industry, and the economy as a whole, awaits next week’s Federal Reserve meeting.

Even before this week's Consumer Price Index report, the Fed was widely expected to lower rates when it meets Oct. 28 and 29.

Now, the CPI report, which shows only modest increases in inflation, has strengthened the case for a rate cut.

Rates have been trending downward

After a couple years of stubbornly high rates as the Fed battled inflation and market volatility, mortgage rates seem to be settling into an extended holding pattern of gradual decline.

This week’s average rate of about 6.25 percent is a yearly low, down from above 7 percent at the beginning of the year. Some analysts expect average rates to fall below 6 percent before the Fed meets next week.

This is welcome news for the housing industry. Home buyers and refinancers have responded with an uptick in new applications. But there’s no guarantee this pattern will hold.

Why the drop? A few factors

Global economic forces shape mortgage rates. This week’s lower rates can be traced to:

• Lower bond yields, especially on the 10-year Treasury bond which often traces the ups and downs of mortgage rates.
• Expectations that the Fed may cut its prime rate at its next meeting.
• The ongoing government shutdown which has created more uncertainty in long-term economic forecasts.
• Lower inflation compared to 2023 and 2024. This week’s Consumer Price Index report, released 10 days late because of the government shutdown, shows an increase of about 3 percent increase in consumer prices compared to last year.

Other data points also shape mortgage rates, but generally, rates can fall when overall economic certainty slips.

How the next Fed meeting will affect mortgage rates

Analysts can depend less on educated guesswork when the Fed announces a decision about its benchmark rate. So the next Fed meeting, scheduled for Oct. 28 and 29, has the economy’s full attention.

The key question: What will the Fed do to its benchmark rate? And how will the Fed’s commentary affect longer-term borrowing costs like mortgages?

Many economists expect the Fed to slash 0.25 percent from its benchmark rate. This can have an immediate impact on home equity lines of credit which are indexed directly to the prime rate.

But the impact on new 30-year fixed-rate mortgages and refinances is less clear. Sometimes, when the Fed cuts its rate, average mortgage rates on new loans increase a little in the short term. Other times, rates fall, tracking the lower Fed rate.

What is more certain: The Fed’s actions on rates show what it thinks about the overall, long-term health of the economy. Higher rates can cool a hot economy; lower rates can spark more development when the economy is lagging.

Is the government shutdown still affecting mortgage rates?

This has been a mixed bag. The ongoing government shutdown has created operational hiccups, especially for new mortgage loans that rely on government insurance or federal flood insurance coverage.

But the general economic unease caused by the shutdown has likely nudged mortgage rates down as investors seek the safety of bonds, lowering their yields. Lower bond yields tend to push down mortgage rates.

Delayed or canceled government reports on employment and inflation, because of the government shutdown, has also stirred uncertainty about the future of the economy.

Is now a good time to buy a home?

Falling interest rates lower borrowing costs and make homes easier to buy. Refinancing to a lower rate can lower monthly payments on the same home while also reducing long-term interest costs.

For example, a $400,000 home loan would require a principal and interest payment of $2,661 at 7 percent. At 6.25 percent the same home would cost $2,463 a month. That $198 in savings per month would rack up more than $70,000 in savings over a 30-year term.

Use a mortgage calculator to run your own loan scenarios.

Seeing the savings that come from a lower rate begs the question: Should I wait another month to see if rates fall even more?

Refinancers usually have this choice since they already own their home. New home buyers face tighter deadlines like expiring leases or the pending sale of their existing homes.

In either case, waiting can backfire since rates can move in either direction, especially during times of economic uncertainty.

Why is my rate different from the rates on the news?

News reports about the ups and downs of mortgage rates usually discuss average mortgage rates. Average rates set the context for individual rates, but every borrower’s situation is unique:

• Borrowers with excellent credit scores and low monthly debt payments who can make large down payments tend to get the most competitive rates.
• Borrowers who struggle to meet a loan’s minimum requirements for down payment, credit score, and debt usually see higher-than-average rates.

To see how all these factors work together for your rate, get a preapproval. Better’s online preapproval can show your borrowing power and estimate your costs in as little as three minutes.

Find out in as little as 3 minutes – no credit impact