Mortgage Rate Predictions
Buying a home can be an expensive business and knowing whether to lock in a mortgage deal or follow the market can be a tough call.
However, there are some indicators in the economy which can help home-owners make a decision about what is likely to be the cheapest way to pay back what they owe.
There are several factors which influence mortgage rates, many of which are updated monthly, but it tends to be the general long term trend which affects interest rates rather than just the latest figures.
The Consumer Price Index (CPI) is a term many Americans will be familiar with and relates to what is considered to be the most important yardstick for inflation. The CPI looks at how the price of a range of goods, such as services, products and consumables, changes over a period of time and measures the difference in cost.
There is a sub-measure known as the underlying CPI, which excludes the effects of energy and food, both of which are much more volatile and this is the figure that economists use as a prediction.
If the CPI is higher than predicted or an inflationary trend appears to be developing, interest rates will rise. Conversely, if the CPI is low, interest rates will fall accordingly.
Another factor which influences the inflation calculations is the labor market and there are two key markers which economists take into account.
The first is payroll data which uses statistics on hours worked, earnings and employment and is an indicator used to predict other less important economic markers. Similarly to the CPI figures, an increasing or upward trend in payroll data is interpreted as higher inflation and sends interest rates up too, whilst lower figures or an overall movement downwards will mean mortgage rates follow suit.
The rate of unemployment is the second indicator from the labor market which is useful to help predict the likely movement of mortgage rates. If unemployment is much lower than forecast or there is a general move towards more Americans being employed, economists see this as inflationary and has the potential to push interest rates higher. More unemployment means the opposite and could see interest rates fall.
The final leading factor which should be carefully watched by anyone hoping to guess how interest rates will move is the gross domestic product (GDP). GDP data, unlike many other important indicators, is produced on a quarterly basis and measures the value of all services, products and goods output over a period and is the single most important factor in measuring the economy.
The GDP figure is compared to previous periods and if the increase is more than expected, the Federal Reserve may intervene and lift interest rates to cap inflation. If the economy appears to be stagnating with little growth, interest rates may be lowered to try and stimulate economic expansion.
There are many other indicators which have an influence on whether interest rates will rise or fall, but the above are the ones which are considered to be the driving factors. When taking out a mortgage it is essential to consider whether it is affordable if rates rise and to leave yourself some wriggle room in your budget. The best way to do this is to use a mortgage cost calculator to estimate how repayments could change with fluctuating interest rates. For those concerned about how interest rate changes may affect their repayments, it may be a good idea to lock in to a fixed rate. Whilst this may mean the repayment will not fall if interest rates drop, at least the amount payable is certain and can be budgeted for.
