How to prepare for a mortgage rate drop
Ever since the middle of the summer, mortgage rates have been slowly drifting down. They had reached their highest point this century in 2023, topping out near 8% last October. But a string of good economic news changed the trajectory of mortgage rates.
All of this started following the July meeting of the Federal Open Market Committee (FOMC), a part of the Federal Reserve Bank. With another FOMC meeting in September, there is speculation that mortgage rates could go down even more.
Without a doubt, a drop in mortgage rates is an opportunity for you to make a big move on your homebuying journey. But the same is true for everyone who’s been asking themselves “when will mortgage rates go down?” That’s why being as prepared as possible, including getting pre-approved with PowerBid Approval, is incredibly important.
Let’s take a look at why there is an expectation of a drop in mortgage rates, what that will look like and what you should do to be ready when rates do drop.
When will mortgage rates go down?
The truth is that mortgage rates have already started going down. After the July meeting, market watchers began to believe that the Fed was poised to cut the federal funds rate at the next meeting in September. So lenders starting pricing in that expectation to the rates they were offering.
How the fed affects mortgage rates
The Federal Reserve doesn’t control mortgage rates.
When you hear that the Fed is cutting interest rates, that is in reference to the federal funds rate. That is what commercial banks use to lend and borrow from each other and it impacts the long-term outlook of the bond market, which is a driver of mortgage rates. That’s why the Fed’s actions can affect mortgage rates, but it happens indirectly.
At the Fed meeting on September 17th and 18th, a 0.5% rate cut was announced, with indications that further rate cuts could come in future meetings.
To answer the question of when will mortgage rates go down, it’s impossible to be exact. The best course of action is to pay attention to mortgage rates leading up to the next Fed meeting.
Why is the Fed considering interest rate cuts?
The Federal Reserve famously has a dual mandate: perusing the economic goals of maximum employment and price stability, which means keeping inflation low. The Fed has traditionally had a goal of 2% inflation. Basically, this means that something that cost $1.00 last year costs $1.02 this year. This is considered a manageable inflation number.
In the summer of 2022, as the U.S. and global economies were dealing with the disruptions caused by the global pandemic, inflation surged to 9.1%, far off the Fed’s goal. Because of that, the Fed carried out a series of rate increases to get inflation under control. This in part led to higher mortgage rates, but it also helped to curb inflation.
Now, with inflation hopefully at an acceptable level, the second part of the Fed’s mandate is coming into play. The Fed is concerned that employment is being hurt. In order to encourage hiring, the Fed is expected to cut the federal funds rate at their next meeting.
What will happen to the housing market when mortgage rates drop?
Before getting into what will likely happen when rates drop, it’s important to acknowledge that old foundational principal of any market: supply and demand.
In the housing market, supply refers to the number of homes that are for sale at any one time. This is called housing inventory. Demand refers to the number of homebuyers in the market at that particular time.
When mortgage rates drop, the demand will likely go up. Buyers who’d been waiting for a more affordable time to buy will start looking for homes.
They will be met by a market that has seen housing inventory improve over the last year, after having been extremely low during the first few years of the pandemic. Over the summer, the number of homes for sale grew by double digit percentage points from the summer of 2023.
Those two factors should make it a good time to buy when rates drop. In that situation, affordability will make homeownership possible for more would-be buyers and there should be enough options that competition amongst buyers shouldn’t be too intense.
Find a home before it’s gone
One thing to keep in mind, however, is that while inventory has improved, it’s still not as high as many housing experts would like it to be. Recent research from Freddie Mac found that the U.S. is 1.5 million housing units below historical averages.
So, while a rate cut might spur buyers to take action in a favorable market, the number of listings could dry up eventually. And that would cause home prices to rise. For buyers looking to take advantage of a rate cut should act quickly. If you don’t find a home you want to buy in the first weeks or months after the rate cut, home prices could start to go up and you could get priced out of the market.
How to compete in the housing market with lower rates
If you’ve been waiting for a Fed rate cut or for the mortgage rates to drop, keep in mind that you’re not alone. Many buyers seem to held off on making a home purchase over the summer, holding out hope that interest rates would go down in 2024. That means that you’ll be dealing with competition. And the best way to deal with competition is to be ready to move fast. Here’s how:
Get finances & credit in order now
When you’re preparing to buy a home, organization is key. Especially when it comes to financing. If you’ve got your ducks in a row, as they say, you can move much quicker when mortgage rates go down.
Gather financial documents like proof of income (W-2s or tax returns for self-employed individuals), asset statements and details on any properties you own. Whether you're purchasing or refinancing, you'll also need contracts, insurance and sometimes additional financial information. Keeping these documents handy and complete helps ensure a smoother process with fewer back-and-forth requests from your lender.
Also, check your credit report and make sure everything is correct. Fix any issues that you see so that you’ll show lenders that you’re a responsible homebuyer.
Calculate the monthly payment you can afford
Knowing how much home you can afford isn’t just about crunching numbers—it’s about peace of mind. By calculating your monthly payments upfront, you can confidently shop for homes that fit within your financial comfort zone. It helps you balance your dreams with practical choices. Plus, it streamlines the buying process, saving you time so you’re able to take advantage of interest rate cuts quickly.
The 28%/36% rule is a helpful guideline for homebuyers to determine a safe borrowing limit It suggests that your monthly mortgage payment should not exceed 28% of your income, while your total debt should stay under 36%. By sticking to these limits, you can ensure you’re not stretching yourself too thin financially, keeping your budget balanced and manageable as you move into homeownership.
Get a mortgage pre-approval
Getting pre-approved means a lender has taken a close look at your current financial health and is willing to lend you a certain amount of money. This is verified by a pre-approval letter. Sellers take these letters seriously because they demonstrate that you’ve already cleared some of the financial hurdles necessary for securing a mortgage.
For a more competitive edge, consider our PowerBid mortgage approval, which helps you compete with cash buyers, close deals quickly with our 5 minute approvals* and simplifies the mortgage approval process.
How can I start the mortgage pre-approval process?
Getting started on a pre-approval is easy. All you need to do is start our online application process, using the financial documents mentioned above. The lender will perform a credit check then provide a Loan Estimate outlining potential costs.
If approved, you'll receive a pre-approval letter, stating the maximum loan amount you're likely to get. Pre-approvals are valid for 60 to 90 days and can be renewed with updated financial information.
When rates drop, get moving
This fall looks like it will be a good time to be a homebuyer. The Fed is expected to cut rates and mortgage rates should come down as well. But keep in mind the old law of supply and demand. Start looking while the supply of homes for sale remains high, because once the homes start to get bought up, home prices will likely go up. That’s why you should get started right away by applying for a mortgage pre-approval.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability and other factors. Contact Rate for current rates. Restrictions apply.
* Rate’s 5-minute pre-approval refers to an automated underwriting review of borrower submitted loan documentation and subsequent pre-approval and should not suggest to a borrower that Rate has fully funded or approved the borrowers mortgage application within 5 minutes. Rate cannot guarantee that a loan will be approved or that a closing will occur within a specific timeframe. Not all borrowers will be approved. Borrower's interest rate will depend upon the specific characteristics of borrower's loan transaction, credit profile and other criteria. Restrictions apply.