Lower mortgage rates on the horizon?
A recent decline in US bond yields is sparking hope for lower mortgage rates, offering potential relief to homebuyers and refinancing opportunities for existing homeowners.
The decline in yields on government securities, which heavily influence home loan costs, suggests that mortgage interest rates will continue to trend downward from last week’s six-month low of around 6.70% for a 30-year fixed-rate mortgage.
This potential drop in rates has already sparked interest among consumers. According to Google Trends data, internet searches for “refi” and “mortgage refinance” on Monday reached their highest point in at least 90 days, doubling the number of searches seen on July 28.
“The last couple of days have been very busy for us with several enquiries coming in and we expect that trend to continue,” Alex Elezaj, chief strategy officer at United Wholesale Mortgage, told Reuters. “People are definitely inquiring about where rates are and when it’s time to refinance.
Despite the growing curiosity, the actual benefits for borrowers might still be some way off.
“People are definitely inquiring about where rates are and when it’s time to refinance,” noted David Battany, executive vice president of capital markets at Guild Mortgage. “But so far, for most people, the rates haven’t dropped enough to make it worth their while to refinance.”
Many existing mortgages have interest rates of 6.5% or higher, according to the ICE Mortgage Monitor. However, with the majority of loans still below this rate, a significant drop in mortgage rates may be necessary for refinancing to become widely attractive.
Patricia McCoy, a professor at Boston College Law School, suggested that a two-percentage-point drop in mortgage rates is generally needed to make refinancing worthwhile.
“It only makes sense to consider refinancing if mortgage rates drop two percentage points below your current mortgage,” McCoy said. “If somebody’s current mortgage is at 6%, it would probably only make sense to refinance if mortgage rates fall down to 4% or lower, and we’re a long way from that.”
Fed waiting to cut
The potential for lower mortgage rates is also tied to expectations that the Federal Reserve may soon start cutting interest rates.
However, the timing and extent of these cuts – and their impact on the housing market – remain uncertain.
Recent data showed that existing home sales have been declining, with a drop recorded for four straight months as of June. Analysts suggest that if the Fed begins to ease its monetary policy, the housing market might see a slight recovery later this year.
Since the Fed started raising rates in early 2022 to combat inflation, mortgage rates have more than doubled, reaching levels not seen in over two decades. This increase, combined with high home prices, has significantly dampened demand for home loans.
According to the Mortgage Bankers Association, applications for home loans dropped to a 30-year low last October and have remained near those levels.
Read more: Will rate cuts be enough to ignite the US housing market?
Even with recent declines in mortgage rates—now over a full percentage point below their late 2023 peak—refinancing activity is still relatively low. Nonetheless, applications for refinancing have seen a slight uptick, now accounting for nearly 40% of total mortgage applications, up from around 30% a few months ago.
“It should be good for home buyers and home sellers because we will find a new equilibrium, and that will be a clearing price for more sales and even for more refis,” said Isaac Boltansky, managing director and director of policy research at BTIG.
However, Boltansky added: “We’re not going to see the lows that we saw during the COVID crisis anytime soon, if ever again.”
The outlook suggests that while mortgage rates may not return to the historic lows seen during the pandemic, a continued drop in US bond yields could still offer meaningful opportunities for borrowers.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
