Purchase, Refinance, or Sit Out: How the Fed’s Rate Cut Will Affect Mortgage Costs

ByNadav ShemerApr. 30, 2020

This site is a free online resource that strives to offer helpful content and comparison features to its visitors. Please be advised that the operator of this site accepts advertising compensation from companies that appear on the site, and such compensation impacts the location and order in which the companies (and/or their products) are presented, and in some cases may also impact the rating that is assigned to them. To the extent that ratings appear on this site, such rating is determined by our subjective opinion and based on a methodology that aggregates our analysis of brand market share and reputation, each brand's conversion rates, compensation paid to us and general consumer interest. Company listings on this page DO NOT imply endorsement. We do not feature all providers on the market. Except as expressly set forth in our Terms of Use, all representations and warranties regarding the information presented on this page are disclaimed. The information, including pricing, which appears on this site is subject to change at any time.

Fed Rate Cuts
Mortgage rates hit all-time lows after the Federal Reserve dramatically slashed the benchmark interest rate last week. What’s more, rates will probably go even lower if, as expected, the Fed keeps cutting rates. This poses an interesting question for home buyers and owners: purchase/refinance now or sit it out in the hope of getting a better deal later?

Mortgage Rates Likely to Keep Falling on Coronavirus, Fed 

The Fed stunned the market on March 3 when it cut the benchmark interest rate by half a point from 1.75% to 1.25% over concerns about the impact of the coronavirus outbreak on the U.S. economy. This was the Fed’s first emergency unscheduled rate decision since the 2008 financial crisis. Investors are betting on an additional rate cut to 0.75% at the Fed’s next scheduled meeting on March 18 and 0.5% or lower by the end of 2020, according to CME Group’s FedWatch tool.

The average 30-year fixed-rate mortgage hit 3.29% on March 5, the lowest since government-sponsored mortgage corporation Freddie Mac began surveying lenders in 1971. Mortgage rates have been falling steadily since late 2018, when the Fed’s target rate stood at 2.50%. 

The Fed’s target interest rate is one of two major benchmarks mortgage lenders look to when setting rates. The reason mortgage rates are lower now than in 2008 is because the 10-year Treasury bond yield – the other benchmark used by mortgage lenders – have also been falling dramatically over coronavirus fears. The 10-year Treasury fell below 1% for the first time ever following the Fed’s March 2020 emergency rate cut. 

In short, the COVID-19 outbreak may be bad for people and the economy – but it is good from purely a borrowing perspective. 

Compare our Top Lenders

LenderRequired Credit ScoreBest FeatureVisit Site
Quicken Loans620+ for most loansRefinance loans approved in minutesView Rates
Credible620 for most loansHassle-free comparisonsView Rates
AmeriSave580+Online application available 24x7View Rates

Is Now a Good Time for a Purchase Home Loan?

Based on the current trend, it may be worth waiting a little while longer before purchasing. That’s because interest rates are falling faster than home prices are rising.If you’re in the market for a new home, it’s worth asking yourself two questions:

  • Am I willing to wait to see if mortgage rates go down from current levels (and accept the risk that rates could stay even or go up)?
  • If, as is likely, mortgage rates keep falling, to what extent might the benefits be offset by rising house prices? 

The answer to the first question depends how much you feel comfortable with risk. It appears likely mortgage rates will keep falling in the near-term. However, they are already lower than at any time in history, so you may be content just getting a mortgage at current prices.

As for the second question, there are never any certainties about where mortgage rates and house prices will go. However, it’s still helpful to understand how you would be personally impacted if the trend of falling mortgage rates and rising house prices continues.

This example shows how the average home buyer would have fared in January 2020 compared to one year earlier. From January 2019 to January 2020, the median U.S. home value rose 3.8% and the average 30-year fixed mortgage rate fell 21.3%. A person buying a house at the median national price in January 2020 would have paid around $9,000 more for their home than 12 months earlier. However, they would have reduced their future interest payment liabilities by $32,730, resulting in a net gain of $23,730.

Home buyers are better off than a year ago – but will the trend continue?


January 2020 January 2019
Median home value $245,000 (rounded) $236,000
Average 30-year fixed rate 3.51% 4.46%
Monthly payments $881 $952
Total interest payments $121,240 $153,970


Is Now a Good Time to Refinance an Existing Mortgage?

If you’re thinking about refinancing, then house prices are irrelevant; the only thing that really matters is where mortgage rates are headed. According to Black Knight, a company that collects data on the mortgage industry, the number of American refinance candidates (defined as people with 720+ credit scores and at least 20% home equity who could cut their current interest rate by at least 0.75% with a refi) exploded from fewer than 8 million in mid-January to approximately 14 million at the start of March. 

If the average 30-year fixed-rate mortgage falls to 3%, there will be more than 19 million refinance candidates. But if mortgage rates quickly climb back to 4%, the number of refi candidates will be less than 7 million.

How to Secure the Best Mortgage APR as Rates Fall

Here are a few ways for home buyers to take advantage of falling mortgage rates.

  • Lock in a rate. Searching for a house and a mortgage at the same time can be a stressful experience. If you need more time to find the right house, some lenders let their customers lock in a pre-approved rate for up to 90 to 120 days. 

  • Take an ARM. Adjustable-rate mortgages offer lower interest rates than fixed-rate mortgages for the first three to 10 years. If mortgage rates are the same or lower at the end of the introductory period, you’re in luck. And even if they end up going higher in that time, an ARM may be the best option if you believe you can pay the mortgage off early. 

  • Shop around. With any lending product, the golden rule is to shop around. Comparing 3-5 lenders is a great way of seeing what’s available right now and what type of rate you can qualify for with your credit profile.

Our Top Lenders 

Quicken Loans

Quicken Loans

Quicken Loans uses cutting-edge technology to guide borrowers to the right loan product and complete the loan approval process quickly. Quicken stands out for offering home equity loans for almost every possible scenario so that you can find a suitable home financing package.

Read the full Quicken Loans review.

Quicken Loans Quicken Loans View Rates

Credible

Credible

The Credible.com mortgage marketplace provides actual, personalized rates from multiple lenders—not teaser rates or ballpark estimates—and a streamlined digital process from shopping to close.

Read the full Credible review

Credible Credible View Rates

Amerisave

AmeriSave

Amerisave Mortgage is a full service mortgage lender, with a variety of loans, including fixed and variable rates of 10, 20 and 30 year terms and a straightforward application with customer service.

Read the full Amerisave review

AmeriSave Mortgage AmeriSave Mortgage View Rates