What homebuyers can expect now that mortgage rates are falling, according to experts

The homebuying landscape could look a little different now that mortgage rates are falling. Witthaya Prasongsin/Getty Images

Before the September Federal Reserve rate cut was even official, mortgage rates began to fall in anticipation, and, as a result, recently hit a three-year low. Some slight upticks followed before mortgage rates decreased again. Rates are now at an average of 6.49% for 30-year fixed-rate mortgages, according to the latest data. That's down significantly from the recent highs of 7% or more that we've seen over the last year. 

And, there could be more good news on the horizon. Right now, it seems likely that the Federal Reserve will cut the federal funds rate again in October and December, based on projections from the CME Group's FedWatch tool. As mortgage interest rates decline with these further Fed rate cuts, though, it could cause shifts within the homebuying landscape. What should homebuyers expect to happen, though? We spoke to several home lending experts to find out what prospective homebuyers should expect with mortgage rates continuing to fall. 

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What homebuyers can expect now that mortgage rates are falling, according to experts

If you're thinking about buying a home in the near future, here's how falling mortgage rates may impact the market. However, it's important to note that supply, demand, pricing and inventory can all vary by region. 

An increase in competition 

When mortgage interest rates drop, it can increase competition in the housing market. Lower mortgage rates make it more appealing to buy a home. Not only that, but it also shifts the affordability equation for many buyers.

"As interest rates drop, people qualify for a higher loan balance to still maintain their budget…which will produce greater competition within the market," says Mark Worthington, loan officer and branch manager at Churchill Mortgage.

As a result, homebuyer competition will likely increase, and you could find yourself in a bidding war with others vying for the same property. 

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Potentially higher home prices 

Further mortgage interest rate drops could also make it more accessible to buy a home. As mortgage rates have remained elevated, many people have been waiting on the sidelines, hoping for a break. Now that mortgage rates have come down from their high over the past year, and with further potential rate drops on the horizon, buying a home may be closer in reach. But any money you might save with a lower rate could be offset by potentially higher home prices. 

"If we get a bunch of buyers into the market…if rates come down, that pressure on the existing inventory tends to cause competition. Competition amongst buyers tends to cause house prices to go up," says Worthington. 

However, that might not be the case across the board. 

"I think it depends on the market," says Karen Mayfield, national head of originations at Multiply Mortgage.

Slower processing times 

When mortgage interest rates drop, lenders also tend to see a surge of activity. 

"We've definitely seen an uptick in applications," says Christy Bunce, president of mortgage lender New American Funding.

It's not just new mortgage applications that see a spike in activity, though. Mortgage refinance applications increase, too. 

"When there was the speculation that rates were the lowest that they've been in three years, which they were, refinance applications jumped significantly for three days," adds Worthington. 

In mid-September, for example, mortgage refinance applications rose to 59.8% of total mortgage activity, up from 48.8% the week prior, according to data from the Mortgage Bankers Association.

When mortgage applications increase, slower processing times may follow, which could delay closing times and impact rate locks. Lenders may have significant backlogs, which could affect approval and closing timelines. 

The bottom line 

Prospective homebuyers waiting for rates to fall further may want to think twice. While home inventory has increased recently, it's still relatively low. 

"My recommendation to buyers that are out there and wanting to buy, buy now if you can afford the home, if you find a home that you love," Bunce says.

We're now in the fall season and approaching the holidays, which Bunce says could be a good time to buy a home. There tends to be a seasonal slowdown, and homesellers may be more open to a price drop.

Locking in a mortgage rate right now to buy the home of your dreams can be a means to an end. If mortgage interest rates fall significantly, you can refinance once it makes sense. If you want the most competitive mortgage rate, you can consider a 15-year fixed-rate mortgage. The current average for a 15-year fixed-rate mortgage is 5.53%, according to Freddie Mac.

"We are seeing more people take advantage of a 15-year fixed [mortgage], because it's about a point difference right now between a 30-year and a 15...If people can afford it, I think it's something that they should at least play with the numbers and look at," says Mayfield. 

Doing your research and working with a vetted mortgage professional can help you decide what's the next best step for your situation. 

Edited by Angelica Leicht