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Interest Rates And Your Mortgag

When you are attempting to time the best time to borrow for your house, picking a time when interest rates are lower will save you a lot of money. If you think interest rates are going up, you will want to lock in a lower rate now, but if you think rates may still fall considerably, you may want to wait before you commit to a home loan.

What determines interest rates depends on many factors, so knowing what they are and how they operate can help you make your decision. If you look upon interest rates as the price of money, and realize that factors like supply and demand influence all prices, you can see how the “”price”" of money can even have an effect on your mortgage.

The inflation rate, which indicates the supply of money, is the first and most important factor in interest rates. The inflation rate has two primary indicators. These are the producer price index and the consumer price index.

PPI is the measure of differences in prices in a given length of for goods at the production level. If PPI is rising, this means that the cost of finished goods is higher, which will lead to inflation.

The Consumer Price Index (CPI) measures the change in prices of a given “”market basket”" of consumer goods. This is a very critical signal of inflation since this is what we will all pay for our purchases. The so called “”basket of goods”" used is consistent so that economists can measure how prices change, but since food and energy are included, they are often eliminated to lower volatility. This leaves what is considered the “”core”" inflation rate which is a better indicator of overall prices and inflation.

GDP is another fairly good predictor of inflation as well as 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 therefore intervenes and when the economy is growing too fast, it will raise interest rates to slow it down, or conversely, lower interest rates to stimulate the economy for more growth.

The next most important interest rate indicator is the unemployment level. Low unemployment is considered inflationary since employers have to chase after too few candidates, and will raise wages to do this. High unemployment usually leads to lower interest rates over time since employers can keep wages lower since there are so many candidates for each job. This is known as the wage price spiral; higher wages lead to higher prices, lower wages to lower prices.

Keeping track of these interest rate indicators will assist you to decide when it is a good time to enter the mortgage market. The bigger picture to watch out for is a falling GDP with unemployment which will predict lower rates. Conversely, higher GDP and decreasing unemployment will signal an increase in interest rates.

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