Homebuyers who didn't take advantage of record-low mortgage interest rates in 2020 and 2021 have had to cope with exponentially higher rates ever since. Thanks to inflation and a concentrated effort by the Federal Reserve to tame it, the federal funds rate soared last year to its highest level in decades. And mortgage rates soon followed, hitting their highest point since 2000. 

As inflation has steadily cooled since, however, mortgage rates have fallen slightly. And they're already down by almost a full percentage point from where they were in November 2023, for example. But there's reason to believe they could start falling consistently shortly, possibly as soon as this August. 

Understanding this possibility, and being prepared for it, is critical for homebuyers engaged in today's unique rate climate, as waiting for an ideal circumstance could lead to getting stuck with a worse rate. To that end, below we've gathered three potential ways mortgage interest rates could drop in the upcoming month.

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3 ways mortgage interest rates could drop in August

Here are three potential scenarios – either combined or individually – that could result in lower mortgage interest rates this August.

The Fed could discuss a cut at their July meeting

While the likelihood of a reduction to the federal funds rate at the conclusion of the Fed's next meeting on July 31 is low (under 5% according to the CME FedWatch tool), that doesn't mean that rates still won't fall on August 1. Depending on what the Fed announces after their meeting and what Federal Reserve chairman Jerome Powell says about the future of interest rates, lenders could adjust their offers to borrowers downward in anticipation of rate cuts to come. While this adjustment will be marginal to start, it could still lead to major savings when viewed through the prism of a 30-year mortgage loan. So borrowers should be prepared to lock in a rate around this time.

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Inflation could fall again

The next inflation report is scheduled to be released on August 14 by the Bureau of Labor Statistics, detailing the inflation rate for July. And if that report is anything like the last three have been – all of which showed a drop in inflation – rates on borrowing products could start to fall as a result. It's important to remember that mortgage rates change daily, accounting for a wide range of economic factors. So if the report on August 14 is an encouraging one, don't be surprised to see rates decline on August 15.

Lenders can start preparing for a formal rate cut

While a formal reduction to the federal funds rate will ensure that mortgage rates drop, it doesn't necessarily have to occur for lenders to begin offering lower rates. Rates have already dropped nearly a full percentage point since last year, as noted above, while the federal funds rate remained frozen. 

But if encouraging economic signs multiply in tandem with one another, lenders can and likely will start preparing for a formal rate cut in September by lowering rates in August. And with the CME FedWatch projecting a drop in the federal funds rate to a range between 5% and 5.25% then, rates on mortgage loans could easily drop in the month prior.

The bottom line

The long wait for mortgage rates to fall could soon be coming to an end in August. And while a formal rate cut appears more likely for September, developments in August could cause rates to start declining in anticipation. For now, borrowers should start shopping for lenders, improve their credit and understand all of their mortgage rate options (from adjustable-rate mortgages to mortgage points and more) so that they're fully prepared to act when a low-rate opportunity finally presents itself again.