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Laura Bromhead

How does inflation affect mortgage rates?

Tuesday, September 6, 2016 - Article by: Laura Bromhead - Prospect Financial Group, Inc. - Message

The federal Reserve decides interest rates in the U.S. Meetings occur eight times a year, where they discuss the economy and set short-term interest rate targets. The Fed takes inflation into consideration whilst discussing rates. Mortgages are denominated in U.S. dollars, so long term values of owning a mortgage can be linked to long-term values of the dollar. When the U.S dollar gains value compared to other currencies, the relative value of that mortgage increase. Mortgage repayments are worth more than they originally were at the time of purchase. On the other hand, when the dollar loses value, the mortgage loses value, and payments become smaller.

Homeowners that have large, fixed-rate mortgages can benefit from higher inflation, as they are paying back the loan with devalued dollars. This can also help homeowners who find themselves "under water" after purchasing during the real estate boom. They can bring equity back into their home quicker. As of right now, the Fed has not printed any new money in over a year, and the economy is slowly and steadily growing.

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