Homebuyers

Calling All First-Time Homebuyers: Lower Mortgage Rates Can Mean Big Savings

Over the last few years, the rise in mortgage rates has prevented many would-be homebuyers from purchasing homes. However, now might be a good time for them to jump back in.

That’s because mortgage rates have come down recently—and may decline further after the U.S. Federal Reserve cut interest rates in September.That may provide a window for cost-conscious first-time homebuyers.

"Mortgage rates are one of the most significant factors affecting the affordability of buying a home," said Raymond Williams, Executive Vice President of Consumer Direct at New American Funding.

The average mortgage rate for a 30-year fixed-rate loan was 6.12% for the week ending Oct. 3, according to Freddie Mac. 

That's well below the high point that rates hit back in October 2023, when rates peaked at nearly 7.8%.

“This changes housing affordability for homebuyers,” said Jessica Lautz, Deputy Chief Economist for the National Association of Realtors.

The decline in mortgage rates means that today’s homebuyers may be able to save several hundred dollars each month and thousands of dollars per year compared to those who bought their home when rates were much higher.

Lower mortgage rates make owning a home more affordable by allowing buyers to stretch their budgets further. With the ability to secure larger loans, buyers can consider more expensive homes without increasing their monthly payments.

Smaller interest rates also mean lower monthly payments, freeing up money for other expenses, providing wiggle room for offers, or allowing buyers to consider higher-priced homes. This increase in purchasing power is an opportunity for first-time buyers, opening doors to homes that may have previously been out of reach.

Understanding mortgage rates

Home affordability doesn’t just center on prices. Mortgage rates play a large part as well. Rates are the yearly interest borrowers pay on home loans, greatly affecting the property cost.

Many things affect mortgage rates, like the U.S. Federal Reserve's policies and the economy. 

“Everything is aligning for slowing inflation, and the government has done a good job of managing it without causing a recession,” said Williams.

Challenges for first-time homebuyers

The housing market is opening up with lower mortgage rates, but first-time homebuyers still face many challenges. The real estate world is competitive, especially for newcomers competing over a limited number of homes for sale.

"While the current rate helps first-time buyers, it might be a big shrug for repeat buyers, as they are locked into ultra-low-rate mortgages that we will not see again," said Lautz.

These homeowners often purchased properties or refinanced during the pandemic when mortgage rates fell to all-time lows.

Because of this “lock-in effect,” many homeowners are choosing to stay put. That means fewer homes are available and more people are vying for the ones that are on the market. This can keep prices high.

This makes it hard for buyers to find a home they can afford. Things like student loans, low savings, and needing money for a down payment make it even more challenging.

However, it should be noted that affordability has improved as mortgage rates have fallen. 

"When mortgage rates drop, it expands the window of affordability for many families, giving them more opportunities to buy a home," said Williams. “However, it's important to keep in mind that as rates decrease, housing prices could rise, potentially offsetting those savings on monthly payments."