Something that hasn’t happened since March 2020 is likely to occur this week – the Federal Reserve will issue a rate cut. With its federal funds rate frozen at a range between 5.25% and 5.50%, the highest in decades, the Fed is poised to issue its first reduction in years, likely by 25 basis points. But additional cuts could come later this year with the Fed set to meet two more times before the end of 2024.

The last time the Fed issued a cut was during the height of the pandemic and rates on borrowing products plummeted as a result. So does that mean that mortgage interest rates, already down by more than a point since 2023, will drop this week, too? Not necessarily. Below, we’ll break down what homebuyers should know now.

Start by seeing how low of a mortgage interest rate you could secure here.

Will mortgage interest rates drop this week?

The short answer to this question is “maybe.” The longer answer depends on a series of considerations that will vary based on the lender in question. That’s because this week’s presumed fed rate cut may have already been “priced in” by the bank or lender you’re planning on using. So the rate that’s listed on the lender website today, for example, may not be materially different than what’s offered after a formal cut is issued on September 18. How much each bank has priced in this week’s cut, however, will vary. 

But mortgage interest rates don’t just follow the Fed’s monetary policy, even though they’re greatly influenced by it. They also track alongside the rate on the 10-year Treasury yield. Mortgage interest rates tend to follow that direction, going up or down as the yield does. This relationship exists because mortgages and 10-year Treasuries are competing long-term investments in the bond market.

When the 10-year Treasury yield rises, it typically indicates higher investor confidence in the economy and potentially higher inflation expectations. This leads investors to demand higher returns on mortgage-backed securities, causing lenders to increase mortgage rates. When the 10-year Treasury yield falls, mortgage rates tend to decrease as well. This correlation means that even if the Fed keeps its policy rate steady, changes in the 10-year Treasury yield can cause mortgage rates to fluctuate. 

And remember that the best mortgage interest rates and terms will always be reserved for borrowers with clean credit histories and high credit scores. So even if rates do fall again later this week, you won’t be able to take advantage if your credit profile isn’t as attractive as lenders want it to be. The rates listed on lender websites, for example, are for those with excellent credit scores. And some will also list their offers with mortgage points already tacked on, making them appear lower than they would be if you didn’t pay that fee to score the lower rate. It’s critical, then, to monitor mortgage rates daily right now and to pay close attention to the fine print to make sure that what’s being advertised is available to a lender with your unique profile.

Start checking mortgage rates online today.

Don’t forget the cumulative effect

Even if mortgage interest rates fall directly in proportion to the federal funds rate — which is unlikely to happen — that reduction will only be by 25 basis points, if the predictions for this week’s rate cut hold true. That will just offer marginal relief to buyers. But don’t forget the cumulative effect of rate cuts. If the federal funds rate is reduced by that same amount when the Fed meets in November and again by the same amount when they meet in December, buyers could be positioned to see significant relief in their rate offers this year. And other possible cuts in 2025 could make it even more affordable to borrow money.

But mortgage rate cuts will inevitably complicate the homebuying process too, likely leading to higher home prices and steeper competition amid buyers that had previously been sitting on the sidelines. So prospective buyers will need to carefully weigh upcoming changes to the rate climate versus acting now to determine which is the most cost-effective approach for their situation.

The bottom line

Yes, mortgage interest rates may drop again this week but, more likely, most of today’s offers have preemptively reflected that cut. But with multiple rate cuts being discussed for the months ahead, the cumulative effect on mortgage interest rates is likely to be substantive. So it’s critical to consider what the homebuying market could look like then versus the benefits of acting now to better determine your best approach.

Learn more about today’s mortgage interest rates here.