Those who were looking to buy a home finally got a major reprieve in September when mortgage interest rates plunged to a two-year low. That came right before the Federal Reserve issued a larger-than-anticipated 50 basis point reduction to its federal funds rate. And it came after years of rising rates, which, at one point, caused those on mortgages to hit their highest level since 2000. But a rate cut in September was supposed to be a precursor to a wider, cooling mortgage rate climate.

But that’s not what happened in October. Encouraged by positive economic data surrounding inflation and unemployment, lenders started raising interest rates as quickly as they dropped them on the assumption that future rate reductions were unlikely to be as substantial as September’s was. And homebuyers and those looking to refinance suffered, as they saw rates on purchases and refinances rise by approximately a full percentage point again. Despite the 50 basis point reduction, mortgage interest rates as of October 31 were just 6.72% on a 30-year mortgage – which is pretty much where they were on August 1, before rates were even cut, according to FreddieMac data.

However, this week, the Federal Reserve is set to meet again in the first meeting since September’s rate cut, and another reduction looks likely. So there’s reason for cautious optimism. But what, exactly, will happen to mortgage rates after this week’s Fed rate cut? That’s what we’ll attempt to break down below.

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What will happen to mortgage rates after this week’s Fed rate cut?

The CME Group’s FedWatch tool has an interest rate cut probability in the amount of 25 basis points pegged at more than a 99% certainty. So the federal funds rate will almost certainly fall once again, this time to a range between 4.50% and 4.75%. But the effect that will have on today’s mortgage interest rates is likely to be muted, for a variety of reasons. Here are three:

Reductions are already priced in: Many lenders already assume the federal funds rate will fall by 25 basis points and have priced in these reductions into their offers preemptively. So you’re unlikely to see a major difference in what rates are offered now and what are offered by the end of the week. That said, if the reduction is 50 basis points instead of the predicted 25, mortgage rates may drop by a more significant margin.

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Mortgage rates are influenced by more than just the Fed: As demonstrated in October when there was no Fed meeting but still a significant increase in mortgage rates, borrowers should know that mortgage rates are affected by more than just Fed actions. Data surrounding unemployment and inflation could also affect what lenders offer borrowers. And the 10-year Treasury yield also has a significant impact. So if these all don’t trend in a positive direction for borrowers, a simply 25 basis point cut by the Fed is unlikely to help much (if at all).

Relief will be gradual: The dramatic interest rate cuts many borrowers experienced in 2020 may have led some to believe that rates can move in a quick and dramatic fashion. But that was directly the result of the pandemic and, has been seen since as inflation rose, the rise in rates was gradual, taking place over much of the last two years. Relief, then, will be gradual, too. 

Multiple reductions to the federal funds rate will need to take place, likely in increments larger than 25 basis points, for borrowers to see relief. And a number of factors could cause either those increments to remain small – or even lead to a pause in rate cuts in full. Understanding this real potential, then, borrowers who have found their dream home now may be better served by buying it anyway – and refinancing their mortgage when the rate climate has leveled off.

The bottom line

Mortgage rates could drop again after this week’s predicted Fed rate cut but major relief is likely to be delayed. That’s because this week’s cut is expected to be minimal and has already been priced in, in advance, by many lenders. Plus, mortgage rates are influenced by more than just what the Fed does or doesn’t do and it will likely take as much time to get rates low again as it did to have them rise. So, if you’ve found a home you want to buy or will see significant relief from refinancing now, even if the available rates are less than ideal, consider acting anyway.

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