Housing News

How Low Will Mortgage Rates Go?

Many homebuyers and homeowners hoping to refinance their high-interest loans were pleasantly surprised when mortgage rates tumbled down this week to their lowest level in more than a year.

The lower rates were the result of the U.S. Federal Reserve indicating last month that it was likely to cut interest rates next month, turbulence in the stock market, and a rise in the nation's unemployment rate. The Fed usually fights economic uncertainty by lowering rates, which generally pushes mortgage rates down.

After nearly two years of high mortgage rates, many are now wondering just how low mortgage rates could go.

"There is always a possibility of a high 5% this year, but I don't see rates going lower than that," said Jason Obradovich, chief investment officer at New American Funding. "I expect rates to be in the high 5s or low 6s by the end of the year."

He anticipates the Fed will cut its rates by three-quarters of a percentage point this year. That would exert downward pressure on mortgage rates.

For the last month or so, rates had been stuck in the high 6% to just over 7% range for 30-year, fixed-rate loans, according to Mortgage News Daily. But on Monday, rates fell to an average 6.34% before bouncing back up to 6.54% on Friday.

"Mortgage rates in the last few days have dropped a ton. [And] there is still a long way to go down potentially," said Obradovich. "This will be good for housing."

Mortgage rates are expected to be volatile

Rate-watchers may want to get used to the swings.

"We anticipate a lot of volatility in mortgage rates over the next 12 months," said Ali Wolf, chief economist of the residential construction data provider Zonda. "For someone who's really looking for the best deal, we could see different pockets over the next six months where we maybe see a [mortgage rate in the 5s.]"

However, mortgage rates rebounded a little as the market reassessed after an "overreaction" to the possibility of a recession, said Oxford Economics Lead Economist Nancy Vanden Houten.

This was because some of the recent economic data was worse than expected, including the higher unemployment rate. That stoked fears that another recession could be looming—leading to lower stock prices and mortgage rates, explained Vanden Houten.

"It's typical financial market behavior where these moves just go too far," said Vanden Houten. "You commonly see it in the following days as markets settle down and reassess."

If the country does succumb to a recession, which many economists are unconvinced will happen this year, the Fed would likely lower rates even more. That would press mortgage rates down further.

"We've got this tug of war between lower rates, which is good for housing, and that coming as a result increased economic uncertainty, which is not good for housing," said Realtor.com Chief Economist Danielle Hale.

Lower mortgage rates could make homebuying more affordable

The good news for homebuyers and those hoping to refinance out of higher-interest loans is that lower rates would make monthly mortgage payments more affordable for many buyers.

For example, someone who bought a $425,000 home with a 20% down payment could save about $220 a month with a 6% mortgage rate versus a 7% mortgage rate. That adds up to nearly $2,600 a year—or more than $78,000 over the life of a 30-year, fixed-rate loan.

The downside for buyers is that lower rates could lead to more demand and competition in the market. That could result in more heated bidding wars and higher home prices.

Nevertheless, those mortgage payment savings could bring more would-be buyers off the sidelines. Reduced rates could also increase the purchasing power of buyers, helping them to qualify for larger mortgages.

In addition, lower mortgage rates could incentivize homeowners who locked in rock-bottom rates around 3% and lower to give up their low-rate mortgages and sell their properties. This could potentially increase the number of homes that go up for sale, easing the housing shortage.

"It will bring in more buyers who previously could not qualify [for a mortgage] at the higher rates," said Obradovich.