subject: Interest Rates And Your Mortgag [print this page] If you are considering buying a house or refinancing your present home, you probably are asking yourself if this is the right time. Those who think rates will increase want to buy sooner and take advantage of currently lower rates, and those who think they will go down want to wait until a better time.
The interest rate on your mortgage will be influenced by many factors and economic indicators, and having a basic understanding of these will help you in your decision. If you regard interest rates as the price of money, and understand that factors like supply and demand influence all prices, you can see how the "price" of money can even affect your mortgage.
The inflation rate, which shows the supply of money, is the first and most important factor in interest rates. There are two major things to watch when it comes to inflation. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).
PPI is the measure of differences in prices in a given length of for goods at the production level. Increases in the Producer Price Index gives us higher prices for finished goods, and that translates to inflation.
The Consumer Price Index (CPI) measures the change in prices of a given "market basket" of consumer goods. This is a very important signal of inflation since it is what we will all pay for our purchases. The so called "basket of goods" used is steady so that economists can measure how prices change, but since food and energy are included, they are often eliminated to lower volatility. The remaining items make up the core inflation rate, which will tell us how prices will perform in the future.
GDP or Gross Domestic Product also predicts inflation and consequently interest rates. Central banks try to foster slow, steady growth in the economy, since zero growth means recession, and too fast growth will lead to inflation. The Fed has certain tools to control interest rates and will use them to increase rates when it needs to slow the economy down and decrease them when it needs to help the economy to pick up.
The unemployment rate is another major component of the economy that will affect interest rates. If the economy is experiencing low unemployment, inflation will most likely follow since salaries have to go up to attract candidates. If unemployment is high, the resulting lower wages will mean inflation will be down. This is called the wage price spiral; increased wages lead to increased prices, decreased wages to decreased prices.
Keeping track of these interest rate indicators will help you to decide when it is a good time to enter the home loan market. A general rule is falling GDP and increasing unemployment will lead to decreased interest rates. Increasing GDP and reduced unemployment means the economy is heating up and you can expect higher interest rates in the future.
