How Inflation Affects Mortgage Rates
Mortgages can often be grouped with similar products that are considered to have fixed rates. These products can include municipal bonds and treasuries, among others. Where it comes to mortgage investments, inflation tends to wear away at their value. But is there a way to tell when inflation is actually occurring?
There are actually several ways to tell. One major indicator is to watch the Core PCE Price Index, which takes both the current and preceding period into account. The Core PCE is the most-favored way for the Federal Reserve to measure inflation. Panic about inflation ensues with the Core PCE rises, which usually causes the Feds to worry about inflation and thereby raise Discount or Federal Funds rates.
Could Mortgage Rates Get Harder For Homeowners To Handle?
As of June 2013, the number of new home sales in the United States has reached their highest point in five years, despite the continuing rise of mortgage rates. This may be due to the fact that many homeowners decided to purchase homes in order to lock in current rates before they could get any higher.
However, an interesting by-product of the improving economy is its ability to even things out, say the experts. Because although mortgages may be getting more expensive, homeowners are, at the same time, realizing other financial benefits in the form of higher wages, improved performance of their investments and better job security.
Who Wins and Loses With Rising Inflation Rates
Those with a fixed mortgage and other fixed rate debts will definitely come out the winners in the case of rising inflation rates. Those homeowners who now find themselves underwater after having purchased their mortgages during the real estate boom's peak will also be triumphant due to their newfound ability to return their negative equity into positive.
On the loser side of the inflation game will be those having variable mortgages, which could see them paying more to borrow on a periodic basis, meaning they will need to make larger mortgage payments. They will also very likely be less able to afford their homes.
While the consumer certainly cannot control inflation, experts suggest that investing in those assets having tangible value, such as Treasury inflation-protected securities. Real estate may be another alternative, although it may not yield much of a return on investment should rates rise quickly. Those looking to sell their homes may find that declining housing prices and a harder hit to the debt likely used to purchase the home will be the reality if inflation increases.
Author Bio: Guest author, Sam Dickson writes on a variety of topics related to the mortgage industry. He recommends anyone in the market for purchasing a home or undergoing a refinance utilize tools such as a home mortgage calculator with taxes in order to determine the feasibility.