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How a mortgage rate cut could complicate homebuying

A cut in mortgage interest rates this year could come with new considerations buyers will need to account for. Getty Images

Many homebuyers are relieved to turn the page on 2023, a challenging year in the housing market. A combination of high inflation and elevated interest rates pushed mortgage rates to a 23-year high at 7.31% and hovered near 7% for the rest of 2023.

When the Federal Reserve kept interest rates the say in December, the committee projected rate cuts in 2024, which is good news for potential homebuyers waiting for lower borrowing costs. While the Fed doesn't set mortgage rates, these rates often tend to rise and fall in line with the federal funds rate. Interestingly, mortgage rate changes often happen before the Fed incorporates changes, as lenders adjust their mortgage rates based on what actions they expect the Fed to take.

In December, the Consumer Price Index grew 3.4% over the previous year, according to the Labor Department. That rate remains higher than the Fed's target inflation rate of 2%. Meanwhile, the federal funds interest rate is holding steady at 5.25% to 5.50%, with mortgage rates tracking at an average rate of 6.6% for a 30-year fixed-rate mortgage, according to January 2024 data from Freddie Mac.

If you're looking for mortgage rate relief, you may not have to wait long, as many economists project the first rate cut to happen this spring. Any rate cuts in 2024 could impact the housing market by freeing up inventory and enticing more buyers to the market, which could complicate the process.

See what mortgage rate you could qualify for here to determine if it's worth acting before that happens.

How a mortgage rate cut could complicate homebuying

Many homebuyers have been sitting on the sidelines, waiting for rates to drop to secure better financing. But even those buyers actively searching for a home are finding limited options.

"It's more of a story about sellers than buyers," says John Beacham, the CEO and founder of Toorak Capital Partners. "In order to buy a house, you need to find a suitable property for sale. Many homes on the market are overpriced, and this is causing pent-up demand from buyers. The key is to get rates down to enable better inventory."

However, if inventory remains low, the demand for housing could become even more competitive as declining interest rates bring more homebuyers into the market. "As rates come down, we expect to see an increase in demand for homes compared to the available supply," says Jason Obradovich, the chief investment officer of New American Funding. "We believe the market will be much more competitive this year than it was in 2023 with more multiple offers and fewer concessions from sellers. Because of this, cash offer programs will be popular, as buying with cash can give buyers a competitive advantage."

See what mortgage options are available to you today here.

How to navigate the 2024 housing market

If you've been sitting on the fence waiting to buy a home, 2024 may present more opportunities to buy than in recent years. Many housing and economy experts anticipate increased inventory and falling interest rates. Still, it's essential to monitor trends closely and gain as much information as you can to make an informed decision.

"Over the course of the year, your choices as a buyer should get better," says Beacham. "I expect more of a buyer's market towards the second half of 2024, with better financing options and more inventory. While prices may remain in the same ballpark, better selection is on its way."

Benefits of buying a home now vs. waiting for rate cuts

While it can be wise in many cases to wait for lower interest rates before purchasing a home, there are scenarios where buying now may make sense. If you anticipate lower mortgage rates in the future, you may benefit from purchasing a home now and refinancing later to a lower rate if mortgage rates drop. Similarly, home prices could rise while you wait for lower mortgage rates.

"If the situation warrants it, buyers should consider purchasing now, with prices being somewhat soft before rates drop and demand starts to spike," says Obradovich. "This will allow them to buy the home they want now at a reduced price, with the option to refinance later to lower their mortgage payment when rates drop."

The bottom line

Monitoring mortgage rates and housing trends can help you make more informed decisions as a homebuyer. Keep in mind, however, that rate fluctuations can be unpredictable. Generally, aim to base financial decisions on how they align with your overall financial plan and goals.

If you're looking to take advantage of reduced mortgage rates, remember you can often obtain lower rates by putting down a larger down payment, improving your creditworthiness and buying points upfront. Remember, even a minor mortgage rate reduction could result in substantial savings over the term of your home loan.

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