Educating homebuyers on mortgage interest rates this fall

Four questions with U.S. Bank’s Head of Retail Home Lending

During its September meeting, the Federal Reserve announced it will drop interest rates for the first time in more than four years. To help potential homebuyers understand how rate cuts may impact mortgage rates and the housing market, we checked in with our Head of Retail Home Lending, Fred Bolstad.

Q. How do interest rates set by the Federal Reserve impact mortgage rates?

A. Many people don’t realize that mortgage rates are influenced, but not set, by the Federal Reserve. Interest rates for mortgages are more closely tied to the bond markets and the yield on a 10-year Treasury security, along with other economic factors. In early July, these factors started bringing mortgage rates down, giving many of our clients the opportunity to refinance or feel more comfortable purchasing. If the Federal Reserve continues to lower rates, we may see continued improvement in mortgage rates, giving a larger population across the country refinance opportunities and increased buying power if they have been sitting on the sidelines looking to purchase. When buying power goes up, it means a buyer can afford a higher-priced home.

Even a small reduction in interest rates can impact affordability. For example, using our U.S. Bank Mortgage Payment Calculator to calculate the monthly payment on a $500,000 home with 20% downpayment and a 30-year fixed rate loan – a borrower could lower their monthly payment by approximately  $130 a month ($1,560 each year) with a .50% reduction in mortgage rates.  

Q. Will a drop in interest rates make refinancing a viable option for existing homeowners looking to reduce their current rate?

A. When it comes to refinancing, it truly depends on your individual scenario. Refinancing can be a good option if you plan to stay in your home for a long enough period that you can recoup the cost of the refinance. This is called your break-even point. You also want to consider the rate you are refinancing for, to ensure it is worth the upfront cost of the refinance. We’ve helped many buyers who bought at the peak refinance with a 1.5% reduction in their interest rate, providing a significant monthly savings. Talking to your mortgage lender is a great place to start if you are considering a refinance. 

Q. Will a change in interest rates impact the housing market? 

A. We know there are many buyers, at all price points, who have been sitting on the sidelines waiting for either rates to go down or for inventory to increase. A reduction in mortgage interest rates will likely impact both of those groups of would-be buyers, which means the environment for buying and selling a home may change as well. Housing inventory is still challenged in many markets across the country, even though it has increased from its all-time low. If we continue to experience a gradual reduction in mortgage rates, we’re likely to see homeowners become more comfortable selling.

Q. What should potential buyers do now to prepare for homebuying this fall?

A. We know that a lot of homebuyers first look at real estate apps like Zillow and Redfin to check out homes in their area and price ranges. This will give you a good sense of inventory and price, but it’s equally important to meet with a mortgage loan originator early in the process to understand the amount and type of loan you qualify for. This is called getting pre-approved. Being pre-approved for a mortgage can greatly help when you find a home and want to make an offer, especially when inventory is low. A mortgage loan originator can also help you understand what downpayment assistance programs you may qualify for. That’s valuable information you can’t get from scrolling listings alone.

To find a mortgage loan officer in your area, visit mortgage.usbank.com.

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Disclosures:

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Loans and lines of credit are offered by U.S. Bank National Association.