Given the excitement surrounding the likelihood of another Federal Reserve rate cut by the end of this year, you might think Christmas has come early to the housing market.
People attach almost magical powers to the Fed and its interest rate cuts. Supposedly, rate cuts will benefit homeowners and would-be homebuyers.
While it’s true that rate cuts have some benefits, it’s a mistake to think that Fed rate cuts affect all interest rates.
Here is the truth behind several myths about how Fed rate cuts may impact mortgage rates and the housing market.
[READ: Compare Current Mortgage Rates]
Myth No. 1: The Fed Controls Mortgage Rates
The federal funds rate and mortgage rates are both interest rates. Beyond that, they are very different.
“While the Fed’s rate decisions primarily influence short-term interest rates, mortgage rates are more closely tied to long-term bond yields,” says Yosef Adde, owner of real estate site I BUY LA.
This is important because near-term and long-term outlooks for the economy can differ. This can cause short-term and long-term interest rates to behave differently.
There’s a fundamental difference in how the federal funds rate and mortgage rates are set.
The Fed directly controls the federal funds rate. Mortgage rates, on the other hand, are determined by lenders making independent decisions based on inflation, economic growth, market demand and competitive forces.
Therefore, mortgage rates often move in response to different influences and motivations than the federal funds rate.
Myth No. 2: Fed Rates and Mortgage Rates Always Move in the Same Direction
While the Fed does not set mortgage rates, mortgage lenders are concerned with some of the same economic forces the Fed watches. So, both rates may move in the same direction — but not always.
While the Fed and mortgage lenders are both concerned with inflation, the Fed balances this concern with trying to keep the job market strong. In contrast, mortgage lenders are more worried about inflation eroding the value of the interest and principal payments they’ll receive in the future.
“When inflation goes up, lenders usually raise mortgage rates to make sure they get a good return on their loans,” explains Eric Bramlett, owner of Bramlett Partners Real Estate. “So, even if the Fed cuts rates, mortgage rates might not go down — they could even go up.”
[Read: Best Mortgage Refinance Lenders.]
Myth No. 3: Mortgage Rates Are Currently High
Speaking of high mortgage rates — are they really that high?
After seeing mortgage rates rise by nearly 3 percentage points over the past five years, it would be natural for someone to call today’s mortgage rates “high.” However, a longer-term view paints a different picture.
Over the past 50 years, 30-year mortgage rates have averaged 7.31%. That’s about a percentage point higher than the mid-October rate of 6.39%.
That might come as a surprise to anyone who got used to the 3% and 4% mortgage rates that were common from 2012 to 2022. However, from a historical perspective, that decade was very unusual. By comparison, today’s rates are fairly normal — in fact, a little below normal.
However, affordability is another story. As home prices have increased over time, incomes haven’t kept pace: In fact, home affordability has declined 44% since 2019, according to a 2024 report from TD Bank. “The last time buying a home was this unaffordable was in the mid-1980’s,” according to the report — a time when mortgage rates were several points above where they are now.
[SEE: Current Jumbo Mortgage Rates]
Myth No. 4: A Drop in Mortgage Rates Would Benefit People Who Have a Mortgage
According to the latest Household Debt and Credit Report from the Federal Reserve Bank of New York, consumers are laden with $18.39 trillion in debt. The vast majority of that is $12.94 trillion in mortgage debt.
A common assumption about rate cuts is that they will provide timely relief for households struggling with high debt burdens. However, since most of that debt is mortgages, a drop in short-term rates would have limited impact.
After all, most mortgages have fixed rates. That means even if rates drop, current homeowners won’t automatically benefit. Those homeowners are locked into their existing mortgage rates. Only if mortgage rates experience a large, sustained decline will some homeowners be able to benefit by refinancing.
Myth No. 5: A Drop in Mortgage Rates Would Benefit All Would-Be Home Buyers
While current homeowners won’t necessarily benefit from a drop in mortgage rates, it would at least help would-be homebuyers, wouldn’t it?
This is only true of some homebuyers. Those with less-than-perfect credit profiles and lower down payments still won’t qualify for the lowest mortgage rates.
There is a positive side to this. There are things homebuyers can do to make themselves more attractive to lenders. As Adde says, “Beyond waiting for general rate drops, buyers can take proactive steps to secure better mortgage rates.”
Adde and Bramlett say borrowers should do these things to getbetter rates:
— Work on your credit score.
— Save for a bigger down payment.
— Shop aggressively, because rates can vary significantly among lenders.
In short, your mortgage rate won’t necessarily go down with a Fed rate cut. But if you play your cards right, it might go down without one.
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No, Your Mortgage Rate Won?t Go Down With the Fed Rate Cut — Debunking the Myths originally appeared on usnews.com
Update 10/24/25: This story was previously published at an earlier date and has been updated with new information.
