How are borrowers reacting to the Federal Reserve rate cuts?

When William Doolittle and his boyfriend applied for a mortgage loan in early September, the couple decided to hold off on locking in a 5.125% rate. The Federal Reserve was expected to lower its key interest rate later that month, and Doolittle and his partner hoped the cut would drive down mortgage rates even further.

The wait cost them.

Mortgage rates have been ticking up after a steady decline in August and the first half of September, with the average 30-year mortgage sitting at roughly 6.84%, compared to 6.08% in the week ending Sept. 26, according to Freddie Mac. Doolittle said he locked down a mortgage rate for a home in Ithaca, New York, before rates jumped too high, but his attempt to time the market means he'll pay an estimated $300 more per year on his home compared to his initial offer.

Despite the higher rate, Doolittle said he and his partner are still thrilled to have found a turnkey home that checked all of their boxes: a garage for the winters, plenty of backyard space, and spare bedrooms for guests or future kids.

"When you’re a first-time homebuyer, you feel in the woods,” Doolittle, 31, said. Mortgage rates are "really tough to predict, and we knew we were gambling a little bit ... (but) we’re still happy with the outcome.”

A NerdWallet survey conducted by The Harris Poll in July found 61% of Americans planned to take some sort of financial action after the Fed's rate cuts. But while the key interest rate can influence various loans, consumers are learning that timing big purchases around rate cuts isn’t always the best move.

"I would caution consumers against putting too much stock in the promise of lower rates, or rates hitting a certain level by a certain point next year," said Elizabeth Renter, senior economist at NerdWallet. For certain purchases, "as you wait, you're risking a lot."

Why timing a mortgage loan isn't easy

The central bank cut its key interest rates twice this year, knocking it down 75 basis points to a range of 4.5%-4.75%. More cuts are predicted for 2025.

The benchmark rate has ripple effects throughout the economy. As the Fed's rate ticked up in the aftermath of the COVID-19 pandemic, so too did mortgage rates, auto loans, credit card rates and student loans.

Lowering the benchmark rate should soften those rates, too. But while financial institutions may be quick to drop rates paid on savings accounts after rate cuts, loans tend to fall at a slower clip.

And consumer loan rates are influenced by more than just the Fed, making them harder to predict.

For example, mortgage rates tend to follow the 10-year Treasury yield – the rate the federal government pays investors to borrow money from them for a decade. That yield has been on the upswing amid concerns that President-elect Donald Trump's proposed fiscal policies will be inflationary, which could mean higher mortgage rates for longer.