The Federal Reserve is expected to lower interest rates at its meeting on September 17–18. Many homebuyers believe incorrectly that they can get a lower rate by waiting until a cut becomes official.
The Fed is expected to cut interest rates in September. What does your research say about whether borrowers should wait to take out a loan?
Many people make the mistake of waiting to take out a mortgage or other long-term loan if the Fed lowers interest rates in the future, according to our research. After the Fed lowers interest rates, people hope to secure a lower interest rate on a long-term loan. A long historical data sample shows that there is no need to wait. Interest rates on long-term loans have already dropped as a result of information about upcoming cuts in short-term rates.
People rush to lock in long-term loans when the Federal Reserve announces that it is likely to gradually raise interest rates over the next year. Again, this is a mistake. Short rate increases by the Fed do not necessarily translate into long rate increases as well. In response to such an announcement, the long rate jumps immediately, and locking in long-term debt before the Fed raises short rates is not a wise move.
In both cases, people fail to realize that the current long-term interest rate already represents the average of expected short-term interest rates over the loan’s life. Hence, long rates have already taken into account all public information about Fed policy regarding short rates. There is no positive correlation between expected short-term changes and expected long-term changes in the data.
When to Buy
If you have checked all those boxes, then you’re ready to hire a realtor and get to buying! You may be tempted to wait around for a better interest rate or more affordable home prices, but that’s not a good idea for these four reasons:
- If interest rates continue to drop, then house prices will start going up. Lots of people have not been able to afford a house because of high interest rates, so they’ve been sitting and waiting. As mortgage rates keep getting lower, more and more of those people will start buying homes and as demand goes up then sellers will begin to increase their prices.
- You can always refinance down the road. If you buy now and interest rates continue dropping over the next year or two, you can still take advantage of the lower rates by refinancing your mortgage. On the other hand, if you wait to buy and home prices go up, you’re stuck with the higher prices. Think of it this way: You date the interest rate, but marry the house.
- Mortgage interest rates in Texas may be high right now, but they’ve already begun to drop. That means, if you buy now, you’ll already be getting a better deal than you would have gotten in 2023.
- The Federal Reserve is unpredictable. You can never know exactly what the Federal Reserve will decide to do with the federal funds rate, which directly impacts mortgage rates across the country.
Overall, you never want to decide whether to buy a house purely based on what the market is doing. If you’re in good shape with your money, there’s no reason to wait.
While mortgage rates may continue to drop in 2024, the drop isn’t likely to be drastic. It’s unlikely that rates will quickly return to the 2–3% range we saw at the end of 2021. We’re not going to see the bottom fall out anytime soon.
As an example, the National Association of REALTORS® predicts that rates will continue to fall in 2024, but only by half a percent (to 6.5% for 30-year mortgages).
You might save a hundred bucks or so on your monthly payment with a lower interest rate, but it’s a small difference. Even though it’s a discount, it’s not worth waiting around for-especially since you can refinance in the future.
