Inflation and mortgage rates are two key factors that impact the economy and affect individuals’ finances and over the past year both of these factors have been very active in the news cycle. But what is the correlation between mortgage rates and inflation and how do they impact each other?
First, let’s define what inflation and mortgage rates are. Inflation is the rate at which the general level of prices for goods and services is rising, and, as a result, the purchasing power of currency is falling. Mortgage rates, on the other hand, are the interest rates charged by lenders to borrow money to purchase a home.
Now, let’s dive into the relationship between inflation and mortgage rates. In general, inflation and mortgage rates have an inverse relationship. This means that when inflation increases, mortgage rates tend to rise as well. The reason for this is that inflation erodes the purchasing power of currency, and lenders require higher interest rates to compensate for the declining value of money.
When inflation is high, the Federal Reserve may raise interest rates to combat inflation. This increase in interest rates will also affect mortgage rates, as lenders will have to pay more to borrow money. As a result, mortgage rates will rise, making it more expensive for people to buy homes.
On the other hand, when inflation is low, mortgage rates tend to be lower as well. This is because lenders can borrow money at a lower interest rate, which allows them to offer lower mortgage rates to borrowers. When the Federal Reserve lowers interest rates to stimulate the economy, mortgage rates also tend to decrease, making it more affordable for people to buy homes.
It’s worth noting that the correlation between inflation and mortgage rates is not always straightforward. Other factors, such as the state of the economy and the housing market, can also impact mortgage rates. Additionally, lenders’ individual policies and competition can affect the mortgage rates they offer.
Inflation and mortgage rates have a complex relationship, with inflation typically driving mortgage rates higher. It’s important to keep an eye on both inflation and mortgage rates when considering buying a home or refinancing a mortgage. Understanding how these factors impact each other can help you make informed financial decisions.
