Following the Interest Rates- Higher or Lower

When you are attempting to time the best entry point to borrow for your home, picking a time when interest rates are down will save you a lot of money. Will interest rates go up, in which case you should lock in a fixed interest home loan for as long as you can, or are they headed down, which means you should either wait to buy or refinance, or choose a rate that adjusts frequently?

How are these interest rates fixed in the first place, and will understanding that help in the decision making process? If you regard 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 predictor of interest rates is inflation. Inflation is measured by two important indicators called price indicators. The Producer Price Index and the Consumer Price Index are the main two factors.

PPI is the fluctuation 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.

The Consumer Price Index (CPI) measures changes in prices of a fixed ?market basket? of consumer goods. CPI is more well known to most people because it indicates whether the prices we are paying are rising or falling, and by how much. Frequently, to remove some of the volatility of the CPI, analysts examine core inflation, which eliminates energy and food prices from the formula. This allows them to look at the core inflation rate to better analyse where overall prices, and therefore inflation, are heading.

GDP or Gross Domestic Product also predicts inflation and consequently interest rates. Central banks try to foster slow, steady growth in the economy, since zero growth means recession, and too fast growth will lead to inflation. Central banks intervene in the money markets to influence the supply of money to slow the economy down or speed the economy up.

Another important indicator is the unemployment rate. If the economy is experiencing low unemployment, inflation will probably follow since salaries have to increase to bring in candidates. High unemployment will typically lead to lower interest rates since it means lower wages and consequently lower prices. In other words, increased wages lead to a wage price spiral and lower wages bring prices down.

The prospective home buyer can help himself by keeping an eye on these indicators to attempt to determine rates. The bigger picture to watch out for is a lower GDP with unemployment which leads to lower rates. Increasing GDP and low unemployment means the economy is heating up and you can expect higher interest rates in the future.

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