Why Didn’t Mortgage Rates Fall More After the Fed Rate Cut?

The Federal Reserve’s rate cut didn’t translate directly to lower mortgage rates, but some buyers may see ripple effects. Could you be one of them?

The Federal Reserve cut its short-term interest rate by a quarter point on Sept. 17 – the first cut this year. Although mortgage rates dropped, continuing a recent trend, some home buyers may have expected deeper cuts. The 30-year fixed-rate mortgage averaged 6.26% the week of the Fed announcement, Freddie Mac reports. That means mortgage rates are still higher than the 6.09% they averaged a year ago. Why?

How the Fed Cut Relates to Mortgage Rates

The federal funds rate reflects the interest rate that banks borrow and lend to one another, not the rate consumers pay. Mortgage rates are more closely tied to Treasury yields, which have recently lowered, and the general economy.

With this recent cut, markets had made changes beforehand. “Mortgage rates may stay relatively flat in the short term, since markets had already priced in this cut,” says Bill Banfield, chief business officer at Rocket Mortgage.

Buyers Opt for Adjustable-Rate Mortgages

The Fed’s action may benefit prospective home buyers pursuing certain loan products. “Consumers could benefit from lower short-term rates, making adjustable-rate mortgages more attractive,” Banfield says.

The share of ARM applications is surging, accounting for about 13% of all mortgage applications in the latest week — the highest level since 2008, the Mortgage Bankers Association reported.

“ARMs typically have initial fixed terms of five, seven, or 10 years, so those loans do not pose the risk of early payment shock that pre-2008 ARMs did,” says Michael Fratantoni, MBA’s chief economist. “Borrowers who do opt for an ARM are seeing rates about 75 basis points lower than for 30-year fixed rate loans.”

Mortgage Applications Respond to Lower Rates

Overall, mortgage applications for a home purchase have responded to lower rates over recent weeks. Applications were up 3% in the latest week and continuing to climb by double-digit margins compared to a year ago — increasing 20% in the latest report, according to the MBA. The uptick in mortgage applications can gauge future home buying activity, but so far that rise hasn’t led to a meaningful increase in closed home sales. Existing-home sales were up 2% in July month-over-month. That increase was only 0.8% in sales year-over-year, according to the National Association of REALTORS®.

Mortgage Rates Can Vary, So Shop Around

If you’re considering applying for a mortgage loan now, keep in mind that you will likely be quoted different rates by online lenders, local banks, and credit unions, and that difference can add up over time. Be sure to shop around.

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