From deciding whether to remodel a bathroom to investing in energy-efficient kitchen appliances, it's common for homeowners and buyers to wrangle with a wide array of financial choices. However, recent rate shifts have made decision-making more complex for many.
Although the Federal Reserve cut its key interest rate in September, mortgage rates unexpectedly spiked earlier in October after a stronger-than-expected jobs report. While the Fed doesn't directly set mortgage rates, its decisions typically influence them, so many anticipated mortgage rates to decline. Instead, the average 30-year fixed mortgage rate increased to 6.44% from 6.12%.
But there is good news: Despite the recent jump, rates remain lower than last year and are expected to decline further with future Fed cuts. If you are thinking of buying a home—or refinancing a high-rate mortgage—now's a good time to get ready. Gabriel Gershowitz and his wife, Jennifer, are among those considering their next steps. The couple recently purchased a 3-bedroom apartment in Manhattan for their growing family, which includes 3-year-old twin sons and a toddler daughter.
In July, they closed on a 30-year fixed mortgage at a 6.2% rate, which includes the option of 2 adjustments over the life of the loan for a small administrative fee.
It's a discretionary program that could expire at any time, Gabriel notes, so there's an incentive to act sooner rather than later. At the same time, "we don't want to use up both of those adjustments prematurely," he adds.
For now, they are monitoring interest rates and may make their first adjustment in early 2025. The couple is working with their banker, as well as a financial advisor who will help them decide how to best use the money saved from future rate adjustments, such as increasing their savings or making extra payments toward their mortgage.
4 things to know
If you're among the many homeowners and buyers thinking through your next steps, here are some factors to consider.
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1. Mortgage rates are expected to decline.
The Mortgage Bankers Association and the National Association of Realtors both predict rates will drop, expecting them to hit 6% in the first quarter of 2025, with a gradual downward trend throughout the rest of the next year.
Lower rates mean more buying power for house hunters and savings for those who want to refinance or tap into their home equity. Yet, falling rates also come with downsides, such as luring increased competition into the housing market, which could push up prices, and the potential for homeowners and homebuyers to stretch their budgets too thin if they overborrow.
For homeowners, refinancing can make sense for those with higher mortgage rates. However, it's crucial to calculate the costs like closing fees and compare them with potential savings.
If the Fed continues to cut rates, borrowing costs for home renovations or other large expenses funded through a home equity line of credit can decrease as well, as HELOCs typically have variable rates tied to the prime rate.
2. Housing supply challenges will persist.
The housing supply shortage will continue to be a major issue, says Collin Crownover, Ph.D., research analyst with Fidelity's Asset Allocation Research Team.
"We're still seeing inventory about half a million units short of what it was pre-pandemic," he says. "The population has grown in that time, so it's a substantial shortage."
Many homeowners with low-rate mortgages are hesitant to give those up, which contributes to the inventory shortage. "There are a lot of people locked into roughly 3% mortgages," Crownover notes. "It doesn't make sense for them to sell their home and swap to a 7% mortgage."
If mortgage rates drop to the 5% range, housing inventory could expand. Homeowners with a mortgage in the 3% range might be more inclined to sell, and in turn, supply would tick up, Crownover says.
Falling rates could also spur new construction. "As rates come down, it makes more sense for homebuilders to build more homes because it's not as expensive to finance it," Crownover says. "A year or 2 down the road, you could see more of the supply kick in."
3. Expect home prices to remain high.
The median existing home price for all housing types in August was $416,700, up 3.1% from a year ago, marking the 14th consecutive month of year-over-year price increases, according to the National Association of Realtors. For homeowners, the price increases are a positive. However, for buyers, especially those with a tight time frame to make their purchase, it can be daunting.
"Affordability is bad, no doubt," Crownover says. "But people have to live somewhere, so if you have to reallocate your budget toward housing to find a place to live, you do it."
The ongoing imbalance between supply and demand means that even as mortgage rates fall, housing prices aren't likely to drop significantly in the short term. Lower prices may tempt more buyers into the market, yet many homeowners aren't eager to sell.
As mortgage rates decline, "the bigger effect is going to be on the demand side," Crownover adds. And with limited inventory, house prices are expected to remain high.
4. Overall housing inflation is cooling, but that may slow down.
There has been some relief, as housing inflation—which includes costs such as home prices, rent, and other home-related expenses—has decreased from 8% to around 5%.
"I expect housing inflation to fall slightly in the near term due to some lagging effects, but not by much," Crownover says. "It should drop a little further but likely not below the mid-3% range, which is near the long-run average of 3%. In fact, it may even tick back up after that."
What should you do right now? Control what you can.
Whether you're buying a home, considering refinancing, or exploring a HELOC, staying on top of rate shifts can help you make informed decisions. Professionals such as a mortgage broker, financial planner, and real estate agent can provide valuable guidance.
And while you can't control rate changes, you can control your financial situation to get the best rates. Among the important to-dos: Improve your credit score and reduce your debt-to-income ratio.
Callan Corcoran and her partner Skyler are taking that type of a practical approach. The first-time homebuyers, who are looking for a condo or townhouse in Northern Virginia, saved a sizeable down payment, built high scores, and are working with a real estate agent and mortgage broker. They are aware of the rate changes, but as Callan says: "Understanding that markets respond faster to changes than we can, we haven't tried to time the market."