The housing market landscape has been challenging for buyers to navigate over the past few years. After all, a perfect storm of high mortgage rates, limited home inventory and elevated home prices has created significant barriers to entry for those looking to purchase a home. With homebuying costs elevated, many potential buyers have been temporarily priced out of the market, leaving them wondering when, if ever, they might be able to achieve their dream of homeownership.

But while the housing market hasn’t been friendly to buyers recently, there are signs that the tide may be turning. In particular, there are economic indicators suggesting relief from high rates could be on the horizon. Not only has inflation cooled to just above the Federal Reserve’s 2% target rate, but the job market is slowing down, too. In response to these developments, the Federal Reserve is finally expected to start implementing rate cuts, with the first one expected at the upcoming Fed meeting that concludes on September 18.

These economic shifts also make it more likely that the Fed will implement more rate cuts in the coming months. Such a move would likely have a significant impact on mortgage rates, potentially opening up new opportunities for homebuyers who have been sidelined by high borrowing costs. With this in mind, it’s helpful to understand how the upcoming rate cuts could affect the cost of a typical mortgage loan, such as one for $600,000.

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How much will a $600,000 mortgage cost monthly after rates are cut?

To understand the potential impact of rate cuts on mortgage costs, let’s first look at what a $600,000 mortgage would cost at today’s average mortgage rates, which are 6.41% for 30-year fixed mortgage loans and 5.78% for 15-year fixed mortgage loans (as of September 13, 2024).

These figures represent the monthly payments for principal and interest only, assuming a 20% down payment (of $120,000) has been made. It’s important to note that actual monthly payments would be higher when factoring in property taxes and homeowners insurance, which vary by location and other factors.

• 15-year mortgage at 5.78%: $3,993.68 per month
• 30-year mortgage at 6.41%: $3,005.57 per month

If the Federal Reserve implements a 0.25% rate cut at its upcoming meeting, and assuming mortgage rates follow suit and drop by the same 25 basis points (though there isn’t always a direct correlation), here’s how the monthly payments might change:

• 15-year mortgage at 5.53%: $3,929.65 per month
• 30-year mortgage at 6.16%: $2,927.40 per month

In this scenario, borrowers could save approximately $64 per month on a 15-year mortgage or about $78 per month on a 30-year mortgage. 

If the Fed were to implement multiple rate cuts totaling 0.50% over the coming months, and mortgage rates were to fall by same 50 basis points, the potential savings become even more substantial:

• 15-year mortgage at 5.28%: $3,866.19 per month
• 30-year mortgage at 5.91%: $2,850.13 per month

With a half-point reduction in rates, borrowers could see monthly savings of about $132 on a 15-year mortgage or about $155 on a 30-year mortgage compared to current rates.

It’s worth noting that these calculations are based on the assumption that mortgage rates will move in tandem with Fed rate cuts. In reality, the relationship between Fed rates and mortgage rates is more complex, and other factors can influence mortgage rates as well.

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Should you wait for rates to drop to buy a home?

The prospect of lower mortgage rates can be appealing, but the decision to wait for rates to drop before buying a home isn’t always straightforward. There are several factors to consider, including:

• Monthly payments: If you’re currently stretching your budget to afford a home at today’s mortgage rates, waiting for a rate cut could make homeownership more affordable and sustainable for you in the long run.
• Buying power: Lower rates mean you might be able to afford a more expensive home while keeping your monthly payments the same, potentially opening up more options in your desired neighborhoods.
• Competition: Lower rates typically bring more buyers to the market. This increased demand could lead to more competition for available homes, potentially resulting in bidding wars.
• Home price appreciation: As more buyers enter the market due to lower rates, home prices could rise. The money you save on interest might be offset by having to pay a higher purchase price for your desired home.
• Timing: While rate cuts are expected, their exact timing and magnitude are not guaranteed. Waiting for the perfect rate could mean missing out on good opportunities in the meantime.
• Opportunity cost: If you’re currently renting, every month you wait is another month of paying rent instead of building equity in a home.

The bottom line

Waiting until rates drop to buy a home could lead to savings of between $64 and $155 per month on a $600,000 mortgage (depending on the loan term and other factors). While the monthly savings can add up over time, the decision to buy now or wait for lower rates depends on your circumstances. If you find a home and can comfortably afford the payments at current rates, it might make sense to move forward rather than risk losing the opportunity. On the other hand, if a small reduction in rates would make a significant difference in your ability to afford a home, waiting could be the prudent choice.