If you are considering buying a home or refinancing your present one, you probably are asking yourself if this is the right time. Those who think rates will increase want to buy now and take advantage of currently lower rates, and those who think they will go down want to wait until a more opportune time.
The interest rate on your mortgage will be influenced by many factors and economic indicators, and having a basic concept of these will help you in your decision. Interest rates are actually the price of money, and just as the law of supply and demand dictates price, the law of supply and demand will influence the price of your mortgage: its interest rate.
The inflation rate, which indicates the supply of money, is the first and most important factor in interest rates. And the inflation rate is influenced primarily by two factors. These include the producer price index and the consumer price index.
The Producer Price Index (PPI) measures the changes in the prices producers need to pay to produce goods. If PPI is rising, this will mean that the cost of finished goods is more, which mean inflation.
The Consumer Price Index (CPI) measures the change in prices of a fixed ?market basket? of consumer goods. CPI is more well known to most people because it shows whether the prices we are paying are rising or going down, and by how much. Certain segments of CPI can ?skew? the results, so analysts frequently remove changes in food and oil prices, which are often too volatile. The volatile segments of food and energy can affect the inflation rate, while core inflation gives a better measure if overall prices are on the rise, causing inflation.
GDP is the next widely used indicator of how inflation and therefore interest rates will behave. Central banks try to foster slow, steady growth in the economy, since zero growth means recession, and too fast growth means inflation. The Fed has the power to intervene in the economy in a number of ways so that it can decrease rates to slow the economy down and increase rates to speed it up.
The next most important interest rate indicator is the unemployment level. Low unemployment is thought of as inflationary since employers have to chase after too few candidates, and will increase wages to do so. If the economy has high unemployment, interest rates will fall because salaries will fall because employers do not feel compelled to offer higher salaries to keep workers. Higher wages lead to price spirals while lower wages lead to prices falling.
Watching these interest rate indicators will help you to choose when it is a good time to enter the mortgage market. In general, a slow economy, with high unemployment, means that interest rates will be coming down, and you should hold off on your loan for a while. Conversely, higher GDP and lower unemployment will signal an increase in interest rates.