Understanding the Relationship Between Mortgage Rates and Inflation

Written by Priority Lending LLC on October 30, 2022. Posted in Mortgage.

Many homeowners and potential buyers or sellers watch the housing market with interest, gauging the best time to act so they can benefit from the best possible mortgage rates. With inflation rising around the country, mortgage rates may suffer some side effects. Learn about the relationship between mortgage rates and inflation from the best mortgage brokers in Tucson, AZ.

What Is Inflation?

Inflation is a consistent rise in the prices of goods and services in a short time, often over weeks or months. While all consumer prices may increase due to shortages, supply and demand, or other factors, inflation shows itself by quickly outstripping worker wages. Everyone feels the impact of inflation, with many people slowing down or stopping discretionary spending.

Types of Inflation

Different circumstances cause inflation, usually falling into one of these three types:

Supply Side Inflation: When the supply of goods and services slows down
Demand Side Inflation: When increased demand causes prices to rise
Inflation Spiral: When shortages or high demand cause panic-buying and inflated prices

What Is the Relationship Between Mortgage Rates and Inflation?

Mortgage rates don’t feel a direct hit from inflation rates but tend to rise with increases in Federal Reserve requirements. The Federal Reserve controls the rate at which banks can borrow money from each other, which trickles down to banks changing the rate at which consumers can get loans. When inflation rises, mortgage interest rates follow suit because the banks need a higher interest rate to match theirs, resulting in higher monthly payments.

FAQs (Frequently Asked Questions) About Mortgage Rates and Inflation

Common questions homeowners, buyers, or sellers have about the relationship between mortgage rates and inflation include the following:

Can inflation affect my current home loan?

Homeowners with a fixed-rate mortgage can rest easy during inflation because their purchase contract stipulates a mortgage rate throughout the remainder of their loan. Adjustable-rate mortgages, or ARMs, don’t have this protection, so homeowners may pay more with their monthly payments as mortgage interest rates rise. If you have an ARM, check into the potential of refinancing into a fixed-rate mortgage before rates increase.

How does inflation affect home prices and sales?

Like the value of everything from food to clothing, home prices soar during inflation. However, these higher prices usually decrease interest from potential buyers, leading to fewer home purchases. Sellers may have to accept lower home bids and work harder to find potential buyers.

How can a potential homebuyer get the best interest rate?

Regardless of inflation, you can still get a great interest rate on your mortgage. Some tips for a better interest rate include:

Avoiding new debt
Maintaining a healthy credit score
Increasing the size of your down payment
Choosing a fixed-rate mortgage instead of an ARM

Get Pre-Approved for a Fixed-Rate Mortgage Today

Start your home search with a mortgage company that understands the relationship between mortgage rates and inflation. Priority Lending LLC in Tucson, AZ, has helped homeowners get the best mortgage interest rates for over 25 years. Call (520) 531-1119 for your free consultation today.

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