Think Lower Rates Mean a Cheaper Mortgage? Not Always

When the Federal Reserve cuts interest rates, it feels like the kind of news that should instantly make life easier for home buyers. Cheaper money, cheaper mortgage, right? Unfortunately, that's not always how it plays out.

One of the biggest myths I see repeated is that mortgage rates move in lockstep with Fed policy. They don't. In fact, many homeowners are surprised to learn their payments don't budge after a rate cut.

The Fed doesn't set your mortgage rate

The Fed's tool is the federal funds rate, which is the short-term interest rate banks charge each other. That matters a lot for things like credit cards, auto loans, and savings yields, but mortgages are a different animal.

Mortgage rates are more closely tied to long-term bonds, especially the 10-year Treasury yield. Those yields move based on expectations for the economy, inflation, and yes, Fed decisions; but often well before an official rate cut is announced.

By the time the Fed makes its move, mortgage rates may have already shifted.

Why you might not see relief

If you locked in your mortgage months or years ago, your rate is fixed. No amount of Fed action changes your monthly payment unless you refinance. And even for new borrowers, lower rates don't always translate to cheaper payments overnight.

Bond markets tend to "price in" anticipated Fed cuts. That means mortgage rates might dip in the weeks leading up to a Fed decision, not after. If the market already expected the cut, there may be little or no movement left when the announcement hits the headlines.

What this means for buyers

If you're house hunting, it's smart to keep an eye on rates, but don't wait around hoping for a Fed cut to slash your monthly payment. Timing the market is tough, and housing prices often adjust alongside borrowing costs. Sometimes lower rates mean more competition and higher home prices, which can cancel out your savings.

Instead of banking on what the Fed will do, focus on what you can control:

• Improving your credit score to qualify for the best mortgage rates available.
• Shopping multiple mortgage lenders to see who will actually give you the lowest offer.
• Considering whether refinancing makes sense if you already own and rates dip far enough below your current loan.

The smarter move right now

If you're not buying or refinancing right now, this is a good time to build your savings.

The top high-yield savings accounts are paying near or above 4.00% APY at the moment. Parking your down payment fund in one of those lets you grow your cash while you wait for the right time to buy, and that interest is money in your pocket.