Easing inflation could signal a new drop in mortgage rates

April 24th, 2013

While recent years have seen a steady decline in mortgage rates, 2013 has been more of an up-and-down year so far. Lately, the trend has seen rates heading back downward, and the most recent release on inflation might help continue that trend.

Declining consumer prices gives rates room to fall

On April 16, the Bureau of Labor Statistics released a report showing that the Consumer Price Index (CPI) had declined by 0.2 percent in March. This easing back in price levels could create room for mortgage rates to keep falling.

Interest rates are generally very sensitive to inflation. If a bank lends money for less than the rate of inflation, the money the borrower pays back will have less purchasing power than the amount the bank lent -- in other words, the bank would lose money in inflation-adjusted terms. Mortgage lenders have to be especially alert to inflation, because most mortgages have such long terms.

While financial professionals know not to make too much of any single month's CPI report -- price changes tend to be fairly erratic in the near-term -- the March number might take on special significance for two reasons. Declines in prices are relatively rare, so this is an especially strong signal that price pressures are easing. Also, following a February report that saw the CPI rise by 0.7 percent -- an 8.7 percent annual rate -- this decline helps calm inflation fears.

From a mortgage lender's perspective, quelling fears that inflation might be flaring up would ease the pressure to raise rates. The fact that the CPI actually declined means there might even be room to lower mortgage rates.

Making sense of the changes

The mortgage market can be unpredictable, but a mortgage calculator can help you figure out the impact of the latest fluctuation in rates. A basic loan calculator can help you decide how expensive a house you can afford, or if you already own a home, a refinancing calculator can give you a side-by-side comparison of your current loan and a loan at today's interest rates.

In either case, what can be helpful is to run a few different scenarios even before changes in rates occur, so you can have certain target rates in mind and be ready to act if those targets are met.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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