Opinion: What could Fed cuts mean for your mortgage?

James Coffer

On Sept. 18, the Federal Reserve cut interest rates by a historic 50 basis points, prompting many homeowners to repeat a common assumption. The Fed cut rates, this line of thinking goes, so mortgage rates will drop as well.

Homeowners are correct that rate cuts often mean opportunity. When the Fed cuts rates, it affects short-term lending rates such as home equities, deposit accounts, CDs and commercial loans. But the general misconception that the Fed controls or sets mortgage rates simply isn’t accurate.

Mortgage rates are influenced by the Fed’s decisions, but they are also tied to mortgage-backed securities – themselves part of the mortgage market ecosystem and bond market.

The way these markets respond to economic changes plays a key role in determining mortgage rates. Given enough time to respond to economic changes resulting from the Fed’s rate cuts, we could see mortgage rates fall in the coming months. But that influence is very different from cause and effect.

Over the past few weeks, I’ve shared this message with many people who have wanted to wait out the Fed’s rate cut, thinking it could mean a lower mortgage rate right away. But the simple truth is that the bond market isn’t quite sure how the economy will accept that historic, 50-basis-point cut. It needs time to see how the change plays out.

On the other side of things, however, is the silver lining.

At the time of this writing, mortgage rates have been trending down for about 45 days, resulting in a two-year low, according to the Mortgage Bankers Association.

This creates potential opportunities for homeowners to save money by refinancing their current home loan – especially those who purchased or refinanced their home in the past 18 months – as we near a 1% difference in interest rates.

A 1% difference might not sound like much. But historically, it has been a great opportunity for homeowners to start exploring options with their lender and potentially lowering their monthly mortgage payment.

That said, I will be the first to tell you that a refinance is not a one-size-fits-all solution. Just because you could save 1% on your interest rates doesn’t mean you should.

Don’t get sucked in by an attractive rate (or worse, an online-only lender that churns through its pipeline of customers just to boost their profits).

Don’t refinance just because it sounds good.

Above all else, don’t forget to consider all the factors as you make your decision.

For example, how long will you stay in your home? Typically, it takes one to three years to break even on closing costs associated with a refinance.

If you’re planning to put your house on the market before you break even, it probably makes more sense to stick with your current mortgage.

You might also ask yourself what your future will look like. Do you have kids? If so, are they graduating from school in the next few years? Are you nearing retirement and thinking about downsizing?

This isn’t an exhaustive list, but you get the idea. We’re all in different places in our lives, and your unique circumstances will determine whether it’s the right time for you to refinance.

Look at the whole picture of your life – what’s coming, what you want to be doing and how you want to get there – and use that information to judge whether a refinance makes sense right now.

Remember, there are a lot of excellent, knowledgeable and trusted people in the mortgage and banking industries in the Springfield metro area. They’ll walk you through options, potential benefits and other factors specific to your circumstances.

These members of our community will help you understand when you’ll break even and what’s best for your future.

And that’s the most important thing.

James Coffer is the president of mortgage banking at OakStar Bank. He can be reached at
jcoffer@oakstarbank.com.