Can someone explain what .5% rate cut means to the mortgage rates to first time homebuyers?
In: Economics
Rates should come down in the near future.
Current mortgages won’t change unless you refinance
Prime rates will drop by about .5% though it should be noted that financial institutions do not have to drop their rates. It is a recommendation not a requirement. Still FIs would be stupid to not drop their rates because it instantly makes them non competitive. You should start to see rates go down anytime between now and a couple weeks from now. The FI I work for is dropping them on the 1st.
If you buy a $300,000 house, putting $60,000 down, so a $240,000 loan, with a term of 30 years:
At 7%, your monthly payment towards principal and interest would be $1597
At 6.5%, your monthly payment towards principal and interest would be $1517
(these numbers do not include escrow payments for property taxes and homeowner’s insurance, which will depend on other factors but should be the same in both cases).
$80/month isn’t a huge difference, but that means almost $1000 ($960) per year and almost $29,000 ($28,800) over the life of the loan.
In recent years, a rate cut usually is followed by several other rate cuts, so if you have the ability to hold off on buying a home just yet. you may be able to secure a significantly lower rate in 12-18 months. The difference between 7% and 4% ($1146/month) is $451/month, which amounts to $5412/year and $162,360 over the life of the loan.
If you have to buy something before then, keep refinancing in mind. If the rate continues to drop, you can refinance when it starts to plateau in a couple years and lock in a lower rate.
It’s cheaper for banks to borrow money from each other. Therefore, it’s easier for them to charge lower mortgage rates to homebuyers.
It’s not 1-to-1 though. A 0.5% rate cut is a change to the Fed’s *target*. Mortgage rates are also impacted by good ole’ supply and demand, and they’ve already been falling for a while yet.
If you are a U.S. first time homebuyer, it generally means that while not immediate – most mortgage lenders will decrease their rates in the near-term (~30-60 days). Note, this does not mean you could expect a .5% rate cut off of today’s rates, but they are likely to go down in the future instead of up for most buyers, including first time buyers. Good luck and shop around!
Most homebuyers start with what they can afford as a monthly payment, then reverse engineer how much house they could afford.
In practical terms, assuming you have a 20% down payment saved (not that most people do, just for sake of easier math), and you could afford a mortgage payment of $1,580.
Yesterday with decent credit, you could get a mortgage at 6.5%, meaning you could afford to buy a $312,000 house on that payment.
In a few weeks when mortgage rates come down to follow the fed rate, assuming you can get 6% on a mortgage, you could now afford a $329,687 house. With a half percent rate drop in this case, you could afford to spend almost $20k more on a house.
However, since you can afford $20k more, so can everyone else, so home prices tend to go up after rate drops.
Bear in mind too, you’d also have to pay insurance and property taxes above this amount, which can be a lot of money.
Mortgage rates have already come down from about 7% to below 6% in recent weeks so the announced Fed rate cut was already priced into mortgage rates. That means it may not have a huge affect.
Almost nothing right now.
Fed rates control/directly influence the shortest-term interest rates (credit card debt, revolving loan, and other debts that fluctuate month-to-month in interest).
Market expectations/demand influence longer-term rates (10-year treasury yield).
Your typical 30-year mortgage is almost exclusively tied to the longer term rates, which have come down substantially in the last year because they expected the Fed to start cutting. So, directly, nothing is going to happen to mortgage rates.
The other piece where MAYBE there is some more benefit is that mortgages are priced with a “spread” to the reference rate. For example say reference rate (10-yr treasury) is 4% and mortgage people apply a spread of 2.5%, your rate is 6.5%. This is much more of a “good feeling/bad feeling” thing that banks use. If the Fed cuts make them feel a little better, they may reduce the spread by 0.25% and now your rate is 6.25% without anything changing to the reference rate.
TL;DR: this cut has been expected for a LONG time now and mortgages are not likely to move in any meaningful sense in the near term
If you want to keep an eye on news that will help lower interest rates meaningfully from where they are today, you are looking for: inflation to get lower than 2% (lower rates help boost inflation) or unemployment to rise sharply (lower rates help spending and supports employment)
When you go to the bank and get a loan, the bank isn’t really lending you their money. The bank is borrowing that money from the Federal Reserve, giving it to you, and charging interest for the loan. The bank borrows it at 5.5% from the Fed and they loan it to you at 7.0% meaning they get 1.5% to keep themselves.
When the Fed cuts rates, it means banks can borrow money cheaper from the Federal Reserve, which means they can lend it cheaper to people like you and me. Now the bank can borrow at 5.0% and lend at 6.5%, they still make their 1.5% and cheaper rates for them means cheaper rates for you.
The value of the money saved in 30 years, not much. A little, but inflation over 30 years the amount saved declines. Rates need to go down further.
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