Last month brought good news for prospective homebuyers who are wary of high mortgage rates: The Federal Reserve — the U.S. central bank — cut its prime lending rate by 0.5% in mid-September, in an effort to cool inflation and stabilize the U.S. economy. That rate cut and its ripple effects should make buying a home less expensive.

Why do lower mortgage rates matter?

The lower the interest rates, the more people who can afford to buy a home, explained Alex Bokich, a senior mortgage consultant at Wintrust Mortgage in the western suburbs.

A buyer’s debt-to-income ratio can be a make-or-break factor in qualifying for a mortgage, Bokich said. Debt payments — combined mortgages, credit card debt, car loan payments and more — shouldn’t be more than half of the buyer’s income. Generally, buyers won’t qualify for a mortgage amount that would put them over the 50% threshold.

“If (rates) drop about a half a percent, millions of new people have that opportunity to purchase a property,” Bokich said.

Why does the Fed control interest rates?

The Federal Reserve has two main responsibilities: promote maximum employment and stable prices. 

Rate setting is one tool the Fed uses to stabilize the economy and meet its so-called “dual mandate.” Although it doesn’t have the power to set mortgage rates outright, cutting the short-term federal rate sends a signal to other lenders — and the country — about how the economy is doing. This filters down to mortgage lenders, which tend to respond by lowering rates, too.

The decision is a sign the Fed is shifting back to “normal dual-mandate mode, where we’re thinking about employment and inflation,” said Chicago Fed president Austan Goolsbee in a news conference. He compared that to the past year and a half, during which the Fed was “singularly prioritizing the fight against inflation — which we had to.”

How much does one rate cut help borrowers save?

The average 30-year fixed mortgage interest rate is around 6.2% right now, compared to a year ago, when the average was closer to 8%. A buyer who didn’t qualify to borrow enough cash for a home in their neighborhood last year may qualify today.  

In other words: A theoretical household earning $60,000 per year with no debt could qualify for a 30-year fixed rate mortgage of $181,443 with 8% interest, according to Fannie Mae’s online mortgage affordability calculator. That same household would qualify for a $211,115 mortgage at 6.2% — a difference of nearly $30,000.To be clear, mortgage rates had been falling for most of 2024, before the Fed cut its rate. That’s because other economic factors, like employment, can influence mortgage rates.

For example, when unemployment rose in August, some economists saw it as a final nail in the coffin, proving the economy was showing signs of struggle and that the Fed would have to cut rates. So lenders dropped mortgage rates in anticipation of a Fed cut, Bokich with Wintrust Mortgage said.

If the Federal Reserve continues to make cuts — which many economists, and Bokich, predict will happen later this year — mortgage rates will likely fall even more.

I’m already a homeowner, but the interest rate on my mortgage is high. Is now a good time to refinance?

Typically, when rates have been up for a while and then they start coming down, it starts making sense for borrowers to refinance. 

But refinancing comes with a fixed cost, so it only makes sense to do if the cost doesn’t outweigh potential savings, said Bokich.

“Let’s say closing costs are $2,000 for example. Would you spend $2,000 to save 20 bucks a month? No, that’s too little savings,” said Bokich. “Would you pay $2,000 to save $500 a month? The answer is yes, because you would break even in four months.”

Plus, the “right” time comes down to each homeowner’s circumstances, Bokich said. In some cases, waiting to see how low rates get is the right move. For others, it may make sense to refinance several times.

 “You refinance now, guess what? In four or five months, if (rates) come down, you can refinance again. Why not?” he said.