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November 2024
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Here's What Happens When Mortgage Rates Drop
Zamrznuti Tonovi / Adobestock

The Federal Reserve's recent decision to cut its key interest rate by half a percentage point—the first cut in four years—has significant implications for both buyers and sellers. While the Fed doesn't set mortgage rates directly, its actions influence them. By lowering the federal funds rate—the rate at which banks lend to each other—the Fed indirectly pushes down other interest rates, including mortgages. However, mortgage rates are also shaped by broader economic factors beyond the Fed's control. Here's what to expect:

Don't Wait for the "Perfect" Rate

If you're considering buying a home, holding out for lower rates might seem wise, but experts recommend acting now. The 30-year fixed mortgage rate is below 7%, down from over 7.6% last year. According to Jessica Lautz, deputy chief economist for the National Association of Realtors (NAR), anticipated rate cuts are likely already factored into current mortgage rates. Buyers should take advantage of today's rates, as refinancing remains an option if rates drop further.

Why Lower Rates Work in Buyers' Favor

Even a 1% rate reduction can save buyers tens of thousands of dollars over the life of a mortgage. Lower rates offer three key benefits: reduced interest costs, smaller monthly payments, and easier loan approvals. Reduced payments lower the lender's risk, increasing the chances of approval. Modest rate drops alone can lead to long-term savings, making homeownership more affordable for many.

More Buyers, More Demand

For sellers, falling rates often bring increased buyer activity. Lower borrowing costs boost purchasing power, drawing more buyers into the market—especially in areas with tight inventory. This increased demand can drive up home prices, making it an ideal time for sellers to list their homes. Acting now allows sellers to capitalize on motivated buyers eager to lock in lower rates before competition intensifies.

Stay Flexible: Negotiations and Agent Compensation

The fall market typically slows, and with buyers holding out for lower mortgage rates, sellers might feel pressure to reduce prices. To avoid this, it's essential to price your home correctly from the beginning to protect your overall return. Additionally, recent changes from the NAR have made negotiations more complex, particularly around buyer's agent compensation. Now that sellers no longer set the buyer's agent fee, offers may include unique terms regarding agent payment. Sellers should be prepared for these new dynamics and stay open to flexible discussions. Adapting in both pricing and compensation can be the key to closing deals and securing the best offers.

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