Following the Interest Rates- Up or Lower
When you are attempting to time the best entry point to borrow for your house, picking a time when interest rates are lower will save you a lot of money. 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 choice. If you look upon 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 most important precursor of interest rates is inflation. And the inflation rate is determined primarily by two factors. These include the producer price index as well as the consumer price index.
PPI is the change in prices at the level where goods are produced. Increases in the Producer Price Index gives us higher prices for finished goods, and that means inflation.
CPI, or Consumer Price Index is the change in prices at the consumer level, as determined by a standard basket of consumer merchandise. It is considered the most important component of inflation, since increasing prices that consumers pay for goods are the basis of inflation. Certain segments of CPI can ?skew? the results, so analysts frequently remove changes in food and oil prices, which can be too volatile. The remaining items make up the core inflation rate, which will tell us how prices will perform in the future.
GDP is the next widely used indicator of how inflation and in turn interest rates will behave. The Federal Reserve Bank tries to maintain the economy on a even level, with neither too much nor too little growth, which respectively cause inflation or recession. The Fed therefore intervenes and when the economy is growing too fast, it will raise interest rates to slow the economy down, or conversely, lower interest rates to stimulate the economy for more growth.
The next very important interest rate indicator is the unemployment level. If unemployment is low, the resulting increased wages will be an inflationary force. If the economy has high unemployment, interest rates will go down because salaries will fall because employers do not have to offer higher salaries to retain employees. Lower wages mean lower prices which equals lower inflation.
If you are thinking about a loan, it is to your advantage to watch these indicators to target the best timing to enter the loan market. A general rule is falling GDP and increasing 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.