Interest Rates and Your Home Loan
by Carlota R. Schneider
Of the many decisions you try to make correctly when you are deciding on a mortgage, timing the interest rate may be one of the biggest. If you think interest rates are going up, you will want to lock in a lower rate now, but if you think rates can still fall considerably, you may want to wait before you commit to a mortgage.
How are these interest rates determined in the first place, and will understanding this help in the decision making process? The price of money is interest rates, and if you understand what will affect the price of money, you will understand what affects interest rates, including your mortgage rate.
Inflation is one of the very important factors in interest rates. Inflation is measured by two important indicators called price indicators. The Producer Price Index and the Consumer Price Index are the primary two factors.
PPI is the measure of change in prices in a given period for goods at the production level. If PPI is rising, this means that the cost of finished goods is higher, which mean inflation.
CPI is the measure of the change in prices at the consumer stage, measured as a group of goods alberta mortgages. Most consumers are more familiar with CPI since it more directly affects what they pay for goods. 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 reduce volatility. The volatile segments of food and energy can skew the inflation rate, while core inflation gives a better measure if overall prices are increasing, causing inflation.
GDP is another relatively good predictor of inflation as well as interest rates. The Federal Reserve Bank attempts to keep the economy growing at a sustainable rate; too slow and production will lag, which causes recession; too fast and the economy may overheat calgary mortgage. Central banks act in the money markets to influence the money supply to slow the economy down or speed the economy up.
The next very important interest rate indicator is the unemployment level. If unemployment is low, the resulting increased wages will be an inflationary influence. High unemployment will typically lead to reduced interest rates since it means lower wages and consequently lower prices. In other words, increased wages lead to a wage price spiral and decreased wages bring prices down.
It can be very beneficial to a prospective homebuyer to keep on top of these kinds of economic indicators to know what is happening in the interest rate arena. A general rule is lower GDP and higher unemployment will lead to decreased interest rates. Growing GDP and low unemployment may signal a faster growing economy and rates will probably be going up.
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