The Federal Reserve Board (the Fed) announced the first interest rate cut in September that it’s made in years, as inflation has finally begun to cool. This could sound like exciting news to homeowners who have been landed with higher-than-comfortable mortgage interest rates, allowing for the possibility of refinancing to cheaper rates.
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While any rate drop offers the opportunity for refinancing, the rate drop might not manifest in the kinds of savings that make owning a house on par with renting at this stage of the game. Here’s an explanation of why.
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The Rate Drop Isn’t Huge
For one thing, The Fed’s rate drop was only half a percentage point, and considering how much rates have gone up in the last few years, unless you have a really big mortgage most homeowners will only see small savings if they were to refinance.
For example, according to the Wall Street Journal, the average rate on a 30-year mortgage only dropped to about 6% this week, which will not bring the average mortgage payment down to the U.S. average rent of around $1,840 per month.
In order for that to happen, 30-year fixed mortgages would need to hit around 5.25% for mortgages to be competitive with rents.
The Savings Could Add Up Over Time
While the current interest rates don’t make homeownership cheaper than, or even as affordable as renting, in most metros homeowners do save if they refinance over time. According to CBS, even a meager $107 per month savings could add up over time to nearly $40,000 in savings on the life of a 30-year fixed mortgage loan.
Location Affects Prices
Home values and prices can vary quite a bit from state to state, with certain regions tending toward lower prices, historically. In places that are more affordable, such as parts of the South and the Midwest, mortgage payments might be closer to rents.
GOBankingRates recently did a study looking at how much mortgage payments have increased through all 50 states and found that states with the lowest increases in mortgage payments over the past decade included Alaska, Louisiana and North Dakota.
Renting Is Cheaper Upfront
There’s no doubt that renting is generally cheaper than owning — as much as 60% cheaper — not only because rents generally remain below mortgages, but you’re not typically paying things like property taxes or maintenance on a rental either.
There Are Still Advantages To Owning
That said, your monthly payment is not the only thing to think about when considering whether to buy or rent. For one thing, the Fed has signaled the possibility of additional rate cuts, and eventually there will come a time when rates fall further, making refinancing worthwhile.
Owning a home also comes with the benefit of earning equity as your home value appreciates, which can then be tapped for things like a home equity loan, or even as cash in hand if you sell the home. While renting often requires less of a commitment, the money you put toward a mortgage is going back into the value of your home.
That said, keep an eye on the Fed’s future rate cuts. By the time there’s an entire percentage point drop, the savings can be much more significant.
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This article originally appeared on GOBankingRates.com: Renting vs. Buying a House: How the Math of Falling Mortgages Could Surprise You
