The Federal Reserve’s rate cut is something of a massive pivot in today’s economic environment-for would-be homebuyers, at least. On September 18, 2024, the Fed cut its benchmark federal funds rate by 50 basis points, taking the rate into a range of 4.75% to 5%. This is the first rate cut since 2020 and has widespread ramifications for mortgage rates standing to benefit from such a decision as people look to either buy or refinance their mortgages.
Understanding the Federal Reserve’s rate cut
The most important way that the Federal Reserve influences the economy is through the level of interest it charges. In the most recent move, the Fed had lowered the federal funds rate, which, in theory, has the effect of making borrowing cheaper to stimulate economic activity and spur consumer spending. The cut this time around came after signs that inflation is easing and that the labor market is softening, and officials indicated that more cuts could come.
While the federal funds rate does not directly set mortgage rates, it greatly influences them. For the most part, where the Fed goes in setting its rates, mortgage rates follow. Currently, mortgage rates have already begun to drop, with the averages at 6.15%—the lowest in two years.
The benefits of locking in a mortgage rate
That could be a good time when homebuyers can lock in a mortgage rate. Some of the advantages that accrue to one upon locking in the lower rate today are as follows:
- Stability against future increases: You will protect yourself from further increases if you lock in your mortgage rate now. If the economic conditions change or if the inflation rises again, rates may climb back up, and the locked-in rate will be considered a prized possession.
- Predictable budgeting: Once you lock in your rate, you have complete predictability regarding what your monthly payment will be. In knowing your interest rate, you can better estimate what future expenses will be.
- Lower stress levels: It is stressful to keep track of mortgage rates. Once you lock in your rate, you no longer worry about daily ups and downs. You free yourself to devote the rest of your energy to other areas, such as home inspections and appraisals.
Potential risks and downsides to locking in a mortgage rate
There is a reason you might want to lock in a mortgage rate now, but there are also risks and downsides to locking in early, including the following:
- Lost opportunities for lower rates: You could be locking in too early to then have the rates drop even more after your lock. It’s all about weighing what the market is presently offering you against what may change in the future.
- Locking fees: Your lending agency may be able to charge fees if you choose to unlock the rate you had decided upon for a lower rate afterward. It is elementary to understand in-depth your lender’s policies beforehand.
- Time limits: Rate locks typically extend between 20 to 60 days. If your closing process is longer than expected, you may lose your locked-in rate unless you pay for an extension to do so.
Market action since the Fed’s rate cut
The deep cut by the Fed is likely to spur demand in the housing market since lower mortgage rates make owning a home more affordable. But this may also translate into more competition for homes and higher prices, which could offset some of the benefits of lower interest rates.
Additionally, originators might experience an influx of applications immediately following the Fed’s announcement. This is likely to cause delays in processing and more conservative underwriting guidelines while they work through the higher volume. It is for this reason that it makes great sense to seek pre-approval as early as possible in the process.
Timing your mortgage lock
In other words, if you were thinking about locking in a mortgage rate, this may be the time to do so. The rate cut by the Fed provides an opportunity for borrowers to lock in good terms as market conditions adjust. However, it’s essential that you carefully weigh your financial situation and consider the pros and potential risks of locking in a rate now.
