How The Fed's Rate Cuts Could Impact Homebuyers
How might lower interest rates impact your housing plans?
Whether you’re a first-time homebuyer or a homeowner, interest rates have the potential to impact your financial plans.
Key takeaways:
- The Fed decreases interest rates significantly in 2024 — a series of decisions that continue to impact real estate markets.
- Lower rates can help you qualify for a larger mortgage — but they can also heat up the real estate market and increase home prices, impacting homebuyers, upsizers and downsizers.
- Lower interest rates may affect mortgage payments for some homeowners, while market changes in response to a rate cut may help you build equity in your home.
Whether you’re looking to buy, sell or just keep an eye on your property values, interest rates have the power to impact your financial plan. Read on to learn how lower interest rates may impact you, based on your situation and goals, and how to take the best next steps.
Why do rate cuts affect real estate?
The interest rate set by the Federal Reserve (also called the Fed) influences the interest rate on several financial products, from the interest you earn on the balance in your savings account to the interest you pay on loans, lines of credit and mortgages.
The Fed’s interest rate directly impacts variable-rate mortgages, so when rates go down, the rate on adjustable-rate mortgages also decreases.
In addition, borrowers can open new fixed-rate mortgages at a lower interest rate than they would have before the cut.
Potential impact on first-time homebuyers
If you’re looking to buy your first home, rate cuts may work in your favor. You’re likely to start being offered lower rates than you were previously. And, because interest rates impact how much you can borrow, you may also find you qualify for a larger mortgage.
These changes can help bring homeownership within reach for you. Plus, buying when rates are low helps you lock in a lower mortgage rate, saving you money on interest over the loan’s lifespan.
But there’s a catch: Other would-be buyers will see their borrowing capacity increase as well, creating more competition in the market. As competition increases, housing prices generally go up, so it may be harder to purchase the home you want.
In addition, rate cuts could signal that the economy is weakening, which might impact your financial well-being. So it’s important to consider several factors, including the overall strength of the economy, to make the right choice for you.
Potential impact on homeowners, downsizers and upsizers
Whether you’re a current homeowner with no plans to move or working toward purchasing your next home, rate cuts may affect you, too.
For one, rate cuts directly impact the interest rate on adjustable-rate mortgages (ARMs), meaning households with an ARM may soon see their monthly payments decrease. This can provide welcome relief to your budget, allowing you to allocate more of your income to other expenses or financial goals.
This week’s rate cuts don’t change existing fixed-rate mortgages, but they generally lower the rates borrowers are offered on new mortgages. If you purchased your home when rates were higher than they are currently, consider contacting a mortgage specialist to determine whether you’re able to refinance at a lower rate to save money on interest.
Lower interest rates may have an indirect effect on your wealth, too. Rate cuts tend to coincide with more buyer activity, which heats up the real estate market and pushes home prices higher. As a result, you may see your home values increase, which unlocks additional equity in your home.
That added equity may help expand your financial options. If you’re looking to upgrade, a more competitive real estate market — and rising prices — may help you sell your home and provide a substantial down payment for your next home. And, if you’re looking to downsize, a more seller-friendly real estate market can help you get the best price for your home, helping to maximize cash on hand following your move.
However, it’s important to note that rate cuts can occur in order to prevent or correct a recession — and a sluggish economy may negatively impact property values.
Regardless of the strength of the economy, equity in your home can be a powerful financial tool to reach your goals. A home equity line of credit (HELOC), for example, allows you to borrow against your home equity to fund a major investment, like a renovation. And it can also provide an added layer of financial security to supplement your emergency fund.
How to set yourself up for success after a rate cut
Because there are so many variables influencing real estate, it may take months or years to see the full impact of interest rate fluctuations. The good news? That gives you time to craft your plan.
Here are some strategies to consider as you map out your next steps.
If you’re a first-time homebuyer
Having your financial ducks in a row helps you move quickly as you shop for homes and submit offers.
Consider reaching out to a mortgage specialist to determine how much you can now afford and assist you with gathering the documents you need to streamline the mortgage pre-approval process. And chat with a financial advisor about how buying a home may impact your finances, so you can adjust your budget accordingly.
This way, you’ll be ready to create a realistic budget to find the right home, and maximize your chances of a winning offer.
If you’re hoping to upsize or downsize
Consider reaching out to a mortgage specialist and a real estate professional to discuss your goals. A real estate professional can offer market insights to let you know the approximate value of your current home, while a mortgage specialist can help you determine how much home you can afford.
Your mortgage specialist can also connect you to other financial professionals who can work with you to create a financial plan, such as how best to use the proceeds from selling your current home.
If housing prices are fluctuating dramatically, they can also help you scenario-plan so you can make the right move for you.
If you’re staying in your current home
Even if you’re not planning to move, a rate cut can be a great opportunity to revisit your financial plan.
Consider talking to a financial advisor about how to make the most of your home equity and discuss whether a HELOC might help you reach your financial goals. You can also discuss the potential benefits of refinancing your mortgage and find a mortgage that better meets your needs.
Get the support you need to make the most of the rate cut
Our team of financial advisors and mortgage specialists is here to support your financial goals. To learn more about our home lending solutions and find an expert near you, connect with us today.
