Here’s How Much a $400,000 Home Loan Will Cost After the Fed Cuts Rates

In today’s real estate market, few factors have as much influence on potential buyers as mortgage rates. After all, mortgage rates are significantly higher than they were a few years ago, when buyers could get mortgages at rates of 3% or less. As a result, buying a home today can be an expensive proposition, especially considering that high real estate prices And limited inventory for sale also drive up costs.

But Mortgage rates have fallen in recent weeks, and Federal Reserve’s first rate cut of the year is looming. While the initial rate cut is expected to be only 25 basis points, even a slightly lower mortgage rate This could translate into significant savings on the cost of a mortgage. It’s also likely that more Fed rate cuts are on the horizon, which could mean mortgage rates could fall further over time.

In turn, many potential buyers wonder whether it makes sense to act now or wait for lower rates The answer depends on factors like your budget and optimal timeline, but it can be helpful to know what the costs are now and what they might be after rates drop. For example, what would your monthly mortgage payment be on a $400,000 loan at current rates — and how much you could save by waiting for rates to fall?

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Here’s How Much a $400,000 Home Loan Will Cost After the Fed Cuts Rates

To understand the potential impact of rate cuts on a $400,000 mortgage, let’s first look at the current environment. As of September 13, 2024, the average 30-year fixed mortgage rate is 6.41%, while the average 15-year fixed rate is 5.78%.

Using these numbers as a baseline, here’s what you can expect in terms of monthly payments on a $400,000 mortgage, assuming a 20% deposit of $80,000:

• 30-year mortgage at 6.41%: $2,003.71 per month
• 15-year mortgage at 5.78%: $2,662.46 per month

These amounts represent principal and interest payments only. Homeowners should be aware that actual monthly costs will be higher when property taxes, homeowners insurance and Private Mortgage Insurance (PMI) if the deposit is less than 20%.

Now let’s look at how these payments might change if the Federal Reserve implements rate cuts:

Scenario 1: Fed Rate Cuts 0.25%

If the Fed cuts rates by 25 basis points at its next meeting and mortgage rates follow suit, the new monthly payments on a $400,000 mortgage might look like this:

• 30-year mortgage at 6.16%: $1,951.60 per month
• 15-year mortgage at 5.53%: $2,619.76 per month

In this scenario, borrowers could save about $52 per month on a 30-year mortgage or about $43 per month on a 15-year mortgage.

Scenario 2: A collective Fed rate cut of 0.50%

If the Fed implements several rate cuts totaling half a percentage point over the next few months, and mortgage rates fall by the same amount, the potential savings become more substantial:

• 30-year mortgage at 5.91%: $1,900.08 per month
• 15-year mortgage at 5.28%: $2,577.46 per month

With a half-point reduction in rates, borrowers could save about $104 a month on a 30-year mortgage or about $85 a month on a 15-year mortgage compared to the monthly cost at current rates.

Over the life of the loan, monthly savings can add up significantly. For example, saving $104 per month on a 30-year mortgage would translate to total savings of more than $37,000 over the life of the loan. This illustrates the potential long-term impact of even small changes in interest rates.

It is important to note, however, that the above calculations assume that mortgage rates will move in tandem with the Fed’s rate cuts. In reality, the relationship between mortgage rates and the Fed rate is more complex, and other economic factors come into play. can also play a role.

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Why You Might Want to Lock in a Mortgage Rate Now

While the prospect of lower mortgage rates is appealing, you may want to consider locking in a rate sooner rather than later. Here’s why:

• Market uncertainty: While rate cuts are expected, their timing and magnitude are not guaranteed. Not only are expected rate changes typically priced in before they occur, but economic conditions can change rapidly, potentially leading to unexpected rate increases.
• Real Estate Price Trends: When rates fall, demand for housing often increases, which can drive up property prices. In turn, the money saved on interest can be offset by having to pay a higher purchase price. if you wait.
• Opportunity cost: Every month spent waiting for lower rates is a month of rent paid instead of building home equityThis loss of opportunity for wealth accumulation must be factored into your decision.
• Competitive advantage: In a market where supplies are limited, having a locked rate can make your offer more attractive to sellers, potentially giving you an advantage over other buyers.
• Historical context: Although current rates may appear high compared to recent years, they remain relatively low from a historical perspective.
• Refinancing option: If rates drop significantly in the future, you still have the option to refinance your mortgagepotentially benefiting from both current opportunities and future rate cuts.

The essentials

While the Fed’s upcoming rate cuts could save money on a $400,000 home loan, there are benefits to be weighed against the risks of early action. If a lower rate could mean the difference between being able to afford a home and being evicted, it might make sense to wait until rates drop before buying a home. But if you’re concerned that more buyers will enter the market, driving up home prices and competition, you might want to lock in your rate now.