Fed Cut Rates, But Mortgage Rates Spike?

This week, the Federal Reserve cut rates for the third time this year. So far, the Fed has cut rates by a whole 1%. And yet 30-year mortgage rates spiked on the news to above 7%, towards the higher end of rates during the past two years. (Source: Mortgage News Daily)

The spike is because the Fed also signaled that they may not have much more room to cut rates. The economy is still strong, and inflation is still not below the Fed’s target of 2%. In fact, the CME FedWatch tool is only predicting one more 0.25% cut through the end of 2025. That is barely anything. (Source: CME FedWatch Tool)

 

Mortgage Rates Are Not Going Down

The problem is that many homebuyers are waiting to buy until mortgage rates come down. While 3% mortgages are not coming back anytime soon—maybe not even in our lifetimes—many buyers have a magic number of 5.5% in their mind as a trigger to buy.

We need to change this magic number. Waiting to buy until mortgages decline to 5.5% hurts buyers in three ways:

1. Missed Wealth Building

Buyers miss out on home appreciation and mortgage balance reductions each month, which contribute to increasing their net worth.

2. Lifestyle Delays

Buyers aren’t living in a home that matches the lifestyle they want. Most buyers purchase a home to live in a place they love.

3. Higher Future Costs

If rates come down to 5.5% and many buyers have the same thought process, pent-up demand will explode. Increased demand with a supply that probably wouldn’t grow as fast means one thing based on the fundamental laws of economics: higher prices. Higher prices could negate—or even overshadow—the savings from a lower mortgage rate.

 

Changing the Mindset on Mortgage Rates

In the spirit of Mr. Thoreau’s quote, we must change our mindset about mortgage rates. If they are not coming down, we must bring them down ourselves.

Fortunately, there are other ways of lowering the interest rate and saving money per month on a mortgage. Here are some examples:

1. 2-1 Buydowns

A 2-1 buydown is a type of mortgage in which the interest rate is lower for the first two years of the loan in exchange for the seller paying a large credit upfront during escrow. The benefits are that the seller gets a higher net purchase price, and the buyer enjoys a lower mortgage payment for the first two years.

We see a 2-1 buydown as a way for buyers to “ease” into a mortgage, especially first-time buyers. If a buyer believes their income will increase over the next two years, then a 2-1 buydown is an ideal way of matching their income to their mortgage payment over the short term.

Let’s say you are buying a home that costs $1,000,000
• You put 20% down, so your loan amount is $800,000 at a rate of 6.75%
• Your monthly payment should be $5,189

2. Seller Financing

Seller financing—where the seller “lends” money to the buyer instead of a bank—is generally considered a pipe dream. However, we have seen an increase in sellers offering this as a way to entice buyers to purchase their homes. (Explore Seller Financing examples in LA County)

Buyers benefit by securing below-market interest rates, while sellers win by selling their home and earning monthly interest income. However, sellers should be aware that offering below-market interest rates may have tax implications with the IRS.

3. Family Loans

Millennials and Gen Z buyers often rely on their parents for financial assistance, but not all parents are in a position to gift money. Instead, we’ve seen buyers request loans from their parents rather than gifts.

This arrangement can be formalized with parents holding a deed of trust and note on the property. It’s a win-win: buyers get a favorable loan, and parents support their kids without compromising their own financial stability.

4. Pledged Asset Loans

Rather than selling stocks or ETFs to fund a down payment, some buyers borrow against their investment portfolios through long-term asset loans. This approach avoids capital gains taxes and allows buyers to continue benefiting from market appreciation.

While these loans offer competitive rates, they do come with risks, such as variable interest rates and potential stock market declines. It’s a strategy best suited for buyers with a solid financial plan.

5. Recasting or Refinancing Your Mortgage

Buyers shouldn’t fixate on today’s mortgage rates when they can refinance later (we wrote a whole other post about this very topic!). Refinancing allows buyers to secure lower rates if market conditions improve.

Additionally, some banks offer recasting, which adjusts the current mortgage and reduces monthly payments without restarting the loan term. This option is often cheaper than refinancing and ensures buyers stay on track with their original loan period.

 

Talk to an Expert

Navigating today’s market requires creativity, strategy, and expert guidance. At Pardee Properties, we specialize in helping buyers explore their options and make informed decisions.