Inflation gives mortgage customers a wake-up call

September 23rd, 2012

Inflation is the worst enemy of low interest rates, and inflation may be coming back. If you've been thinking about buying or refinancing a home, it may be time to run the numbers through a mortgage calculator to see if you can afford to act now. Inflation hasn't pushed mortgage rates higher yet; but if rising prices take hold, it could make the housing environment all the more difficult.

According to the Bureau of Labor Statistics, inflation spiked to 0.6 percent in the month of August. That's the highest monthly price increase in over three years, and one that would translate to annual inflation of more than 7 percent. After just a one-month spike, it remains to be seen whether a sustained trend toward higher inflation will set in. If it does, it could be bad for mortgage customers for three reasons:

  1. It could cause the Federal Reserve to reverse course. The Federal Reserve is buying mortgage-backed securities to try to hold mortgage rates down, but this program was announced on the premise that inflation is under control. If inflation breaks out of an acceptable range, all bets are off.
  2. Mortgage rates might rise despite the Fed. The Fed's intervention can only influence -- not control -- the mortgage market. Even if the Fed stays the course, lenders and investors could still force mortgage rates higher if evidence of higher inflation becomes overwhelming.
  3. Lending standards might become impossibly tough. Even if the Fed succeeds in holding mortgage rates down in the face of rising inflation, there is another potential downside. Faced with the prospect of making loans at rates which offer them no return above inflation, mortgage lenders would be very reluctant to make loans. Qualification standards could become so rigorous that only the most gold-plated applicants would be approved.

Fortunately, mortgage rates did not rise in the immediate aftermath of the inflation announcement, but that flare-up of inflation is a reminder not to take those rates for granted. Since low mortgage rates have created a once-in-a-lifetime opportunity for homeowners and buyers, getting some hard figures from a mortgage calculator makes good sense. Armed with that information, you can at least see whether you are in position to take advantage of the opportunities that exist.

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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