At the Fed meeting today Chairman Jerome Powell said they will be looking at economic growth rather than just inflation control going forward. He indicated he is ready to start cutting interest rates. His remarks all but confirmed they will cut the prime rate at their September meeting. Lenders have been anticipating this and have actually dropped mortgage rates in advance of the September meeting. It is an interesting situation in that if the Fed does drop the prime rate in September, mortgage rates would be influenced but lenders have already been influenced by the promise of the reduction so the mortgage rate drop will most likely be modest.
If the Fed cuts rates by 25 basis points (0.25%) next month, we might see the average 30-year mortgage rate fall from its current 6.57% to around 6.32%. On a $300,000 loan, this would translate to a monthly payment reduction of about $49 – from $1,910 to $1,861. It would also have an impact on the total interest paid over the longer term. CBS New Money Watch put this into perspective, looking at the total interest paid over the life of the loan:
- At 6.57%: The total interest paid over 30 years would be approximately $387,612.
- At 6.32%: The total interest paid over 30 years would be approximately $369,899.
This represents a potential savings of $17,713 in interest over the full term of the mortgage – a significant amount despite the seemingly small monthly difference.
It is possible lenders may not even respond with that big of a decrease since many have already built that decrease in by dropping rates roughly one percent point since May. it is hard to know what they will do. It is a good time to shop now if you are a buyer because if the Feds do drop the prime rate it will be all over the national news and more buyers will start shopping regardless of what actually happens with mortgage rates because the perception will be that "rates dropped." More competition can mean higher prices but of course only time will tell.