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Monthly mortgage payments have ballooned in recent years for people buying homes. However, there might be some financial relief on the horizon.
Homeowners who recently purchased properties with interest rates as high as 8% face much higher monthly mortgage payments than those seen a few years ago. However, with the potential for interest rate cuts, these homeowners might soon be able to refinance their mortgages at lower rates, offering substantial monthly savings.
For example, the average mortgage loan was $350,000 in November, and a person who landed an interest rate of 3% before the pandemic would be paying $1,476 a month on a 30-year fixed-rate loan. That same loan at 8% means monthly payments of $2,568 or a difference of $1,092 every month just for buying a house a few years later.
Of course, interest rates will not return to 3% anytime soon, but homeowners don't need rates to drop much to see a big difference in their bank accounts.
According to commentary sent to reporters in December from TransUnion, the credit reporting agency, there have been three million new mortgages since January 2021 with interest rates at 6% or higher. The total balance on those loans exceeds $1 trillion, with an average monthly payment of $2,201.
Michele Raneri, vice president of US research and consulting at TransUnion, said these homeowners will likely be the first to take advantage of dropping rates.
"We expect those homeowners who are currently making payments on high-interest mortgage loans to be among the first to take advantage of a reduction in rates as refinancing could immediately put real money into their pockets," Raneri wrote in the TransUnion note.
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If interest rates dropped to just 5.5% and a homeowner refinanced, the average payment on those high-interest loans would lower to $1,917, a savings of $284 monthly.
And that's just the average; some people who bought into the housing market more recently would save even more. While mortgage interest rates started to fall in late 2023, they were above 7% for much of the year, peaking near 8% in October, and recently climbed back above 7%.
In the Federal Reserve's December announcement, officials forecast they could start cutting rates in 2024. However, the Fed said in January it would keep rates at current levels until it gains "greater confidence that inflation was moving sustainably towards 2%," according to the minutes release.
While mortgage rates don't directly reflect changes to the Fed rate, they typically trend in the same direction or in anticipation of what the Fed might do.
To be sure, nobody knows for sure how the Fed will act in the coming months.
While some economists have predicted that we could see rate cuts as early as May, others are not as optimistic. Atlanta Fed President Raphael Bostic told CNN that with inflation holding steady in recent months, he doesn't expect the first cut until the summer.
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Whenever cuts happen, a drop in rates would save existing and new homeowners money each month. Still, it would also make younger, first-time buyers more competitive in a market currently being won by Americans who can afford all-cash purchases, especially among the older generations.
The housing market is still struggling, but these are all signs that things could pick up in 2024.
