How Does Inflation Affect Interest Rates? Understanding Current Mortgage Rates
What Is Inflation?
Inflation is an economic phenomenon in which the value of money decreases over time. You might see this reflected in the prices of goods. A bag of groceries costs more and more every year, it seems. In the history of the United States, inflation peaked in 1980, and prices skyrocketed from the year before.
While it may seem like inflation causes the cost of goods to go up, it’s actually that the money we are using to buy them has decreased in value. Inflation can be a difficult concept to grasp, but it’s important to know how rising inflation - or even fears of rising inflation - can affect mortgage rates.
How Does Inflation Affect Current Mortgage Rates?
In short, the higher inflation is, the higher mortgage rates are going to be because of the economic cycle. Often you will see higher mortgage rates when inflation is high, and lower mortgage rates when inflation is low. If you’re in a period of low inflation, it’s smart to lock in mortgage rates now. While economists can partially predict how inflation will rise in the future, you never know what will happen.
Why Does Inflation Affect Mortgage Interest Rates?
Now you know that the higher inflation is, the higher mortgage rates are likely to be. But why? Inflation affects interest rates because the bond market determines the current interest rates. Mortgages are constantly being sold and purchased by investors on the bond market, so as the value of the dollar decreases, the value of these mortgage backed bonds decreases as well. Investors don’t want to hang onto investments that are going to lose value over time, so the mortgage backed bonds see their demand fall. As demand decreases, so do the prices. Then, as the prices of the bonds fall, the mortgage interest rates rise to make up for the lost value.
In short, the higher inflation is, the higher mortgage rates are going to be because of the economic cycle. Often you will see higher mortgage rates when inflation is high, and lower mortgage rates when inflation is low. If you’re in a period of low inflation, it’s smart to lock in mortgage rates now. While economists can partially predict how inflation will rise in the future, you never know what will happen.
Why Does Inflation Affect Mortgage Interest Rates?
Now you know that the higher inflation is, the higher mortgage rates are likely to be. But why? Inflation affects interest rates because the bond market determines the current interest rates. Mortgages are constantly being sold and purchased by investors on the bond market, so as the value of the dollar decreases, the value of these mortgage backed bonds decreases as well. Investors don’t want to hang onto investments that are going to lose value over time, so the mortgage backed bonds see their demand fall. As demand decreases, so do the prices. Then, as the prices of the bonds fall, the mortgage interest rates rise to make up for the lost value.
Conclusion
Inflation has a powerful effect on mortgage rates, both 30 year mortgage rates and 15 year mortgage rates. Interest rates today are strongly influenced by Wall Street, so when the value of the dollar decreases with inflation, investors are less likely to want to hang onto risky investments like mortgage bonds. Then, interest rates rise to make up for this lack of demand. If you’re considering buying a home, do it while mortgage rates are low!
Inflation has a powerful effect on mortgage rates, both 30 year mortgage rates and 15 year mortgage rates. Interest rates today are strongly influenced by Wall Street, so when the value of the dollar decreases with inflation, investors are less likely to want to hang onto risky investments like mortgage bonds. Then, interest rates rise to make up for this lack of demand. If you’re considering buying a home, do it while mortgage rates are low!
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