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Q: How will inflation impact mortgage rates?
A: As inflation continues to put pressure on our buying power, it also has a powerful effect on mortgage and all interest rates. If you are considering buying a home for which you'll need a loan, or refinancing an existing loan, my advise is to take action sooner than later. Markets are anticipating that inflation will continue to put pressure on interest rates so take advantage of historically low rates now.
Mortgage rates move in response to what the 10-year bond is doing which is dramatically impacted by inflation reports and other economic news. When bond prices go down, bond yields go up, and thus mortgage rates go up too as they typically track bond yields. The converse is true too.
Bonds are viewed as a "flight-to-safety" for investors in that there is little risk in owning them. But the enemy of the Treasury bond investor, especially the 10-year Treasury bond, is inflation. In times of inflation, Treasuries will lose money for investors once the effect of inflation is factored into the yields. When investors anticipate inflation will increase, they will tend to sell bonds and buy an investment that won't be eroded by inflation. If you're selling bonds in an inflationary period, the only way to attract buyers then is to offer significantly higher yields (interest). Remember: when bond yields rise, so do interest rates.
If you believe that the core pricing index (excluding food and energy) is going to continue to tick upwards and that we're in an inflationary cycle, then I would expect mortgage rates to inch upwards too. In years 2009 and 2010 we might be looking back at 2008 longingly, wishing for those absurdly low interest rates. Here's an example of how your buying power could be diminished if rates do climb up significantly. $350,000 borrowed on a 30-year conforming fixed rate of 6.00% would mean a monthly payment of $2098.43. For that same loan amount and term, if rates climb to 7.00% next year, you'd have a monthly payment of $2328.56. That's a difference of $230.13 per month. If you are a potential home buyer, or looking to refinance, this is the time to be doing it.
Susan Costello, Mortgage Consultant, is owner of Home Sweet Home Loans. You can reach her at (530) 273-8658.
A: As inflation continues to put pressure on our buying power, it also has a powerful effect on mortgage and all interest rates. If you are considering buying a home for which you'll need a loan, or refinancing an existing loan, my advise is to take action sooner than later. Markets are anticipating that inflation will continue to put pressure on interest rates so take advantage of historically low rates now.
Mortgage rates move in response to what the 10-year bond is doing which is dramatically impacted by inflation reports and other economic news. When bond prices go down, bond yields go up, and thus mortgage rates go up too as they typically track bond yields. The converse is true too.
Bonds are viewed as a "flight-to-safety" for investors in that there is little risk in owning them. But the enemy of the Treasury bond investor, especially the 10-year Treasury bond, is inflation. In times of inflation, Treasuries will lose money for investors once the effect of inflation is factored into the yields. When investors anticipate inflation will increase, they will tend to sell bonds and buy an investment that won't be eroded by inflation. If you're selling bonds in an inflationary period, the only way to attract buyers then is to offer significantly higher yields (interest). Remember: when bond yields rise, so do interest rates.
If you believe that the core pricing index (excluding food and energy) is going to continue to tick upwards and that we're in an inflationary cycle, then I would expect mortgage rates to inch upwards too. In years 2009 and 2010 we might be looking back at 2008 longingly, wishing for those absurdly low interest rates. Here's an example of how your buying power could be diminished if rates do climb up significantly. $350,000 borrowed on a 30-year conforming fixed rate of 6.00% would mean a monthly payment of $2098.43. For that same loan amount and term, if rates climb to 7.00% next year, you'd have a monthly payment of $2328.56. That's a difference of $230.13 per month. If you are a potential home buyer, or looking to refinance, this is the time to be doing it.
Susan Costello, Mortgage Consultant, is owner of Home Sweet Home Loans. You can reach her at (530) 273-8658.
