The Federal Reserve's decision to keep the federal funds rate paused for the third consecutive time has sent ripples through the economy, including the mortgage market. Despite inflation still being above the target goal of 2.0%, the Fed chose to hold off on another rate hike, which could signal better times ahead for homebuyers.
Over the past 18 months, the mortgage market has seen a series of rate hikes, leaving potential buyers facing high rates after years of low rates on mortgages. However, the pause in rates could potentially lead to a decrease in mortgage rates. After the previous two pauses, mortgage rates already saw a decline. On November 1, the average interest rate for a 30-year fixed-rate mortgage was 8.06%, but as of December 13, it stands at 7.31%. Similarly, for a 15-year mortgage, the rate dropped from 7.20% to 6.70% during the same period.
While there's no guarantee, it is possible that mortgage rates may continue to go down in response to the recent pause. With the next Fed meeting not scheduled until the end of January, there is ample time for rates to respond before any further action is taken.
The potential for rate cuts in 2024 adds to the positive outlook for homebuyers. While the Fed did not cut rates in December, Chairman Jerome Powell expects cuts to happen in 2024. If the Fed does cut rates by 0.75% throughout the year, it could result in bigger drops in interest rates for those taking out mortgages. Although rates are unlikely to return to pre-hike levels, it would still provide much-needed relief for buyers who were priced out of the market due to high rates.
Refinancing rates could also benefit from the rate pause. Rates for refinancing homes have already been decreasing recently. On November 1, the average rate for a 30-year refinance was 8.15%, but it has since dropped to 7.45%. Similarly, for a 15-year refinance, the rate lowered from 7.54% to 6.72%. As with new mortgage rates, refinancing rates could further decline in the coming months in response to the rate pause.
The decision by the Fed to pause interest rates for the third time will likely have a significant impact on the mortgage market. While the Fed's benchmark rate does not directly affect consumer rates, they tend to track alongside the federal funds rate. The pause offers hope for potential homebuyers and homeowners looking to refinance, as it could lead to lower interest rates.
In addition to the mortgage market, the Fed's decision to pause rates could also impact other areas of the economy, such as high-yield savings accounts and certificates of deposit (CDs). CD rates are currently high, with the opportunity for significant earnings and little risk. However, the pause in rates could lead to a decrease in CD interest rates. Opening a CD quickly could be beneficial for savers who want to take advantage of the current high rates before they potentially decrease.
CD rates are locked in when the account is opened, meaning even if the Fed cuts rates in the future, savers will continue to earn interest at the rate they initially received. Opening a CD now versus waiting could help avoid a lower interest rate in the future.
Financial advisors suggest considering longer-term CDs now that rates are paused. While previous advice recommended shorter-term CDs to avoid being locked in at a lower rate for too long, the current pause in rates makes longer-term CDs more attractive.
Overall, the Fed's decision to pause rates for the third consecutive time has implications for various aspects of the economy, particularly the mortgage market and CD rates. Homebuyers and homeowners looking to refinance may see potential drops in interest rates, providing relief from high rates. Savers who want to maximize their interest earnings should consider opening a CD quickly before rates potentially decline further.
