Question 1: How do inflationary expectations influence interest rates on mortgage? Please elaborate by expressing your thoughts about your findings in at least 3 – 4 sentences.
Inflation is used to describe the purchasing power that can decrease over a period of time. Inflation also causes the value of the US dollar to drop as it is a self-reinforcing cycle. Inflation changes can also be referred to as “changes in The Cost of Living; the everyday items we buy get more expensive and our heating and gas bills go up, for example.” (Green, 2012). The longer inflation lasts, the more effects are seen. The Mortgage Reports presents a chart that shows the 5 five stages of inflation. The first stage entails inflation causing the US dollar to lose its value to other worldwide currencies. The second step states that as the “US dollar loses value, the value of things denominated in US dollars falls, too. This includes mortgage-backed bonds” (Green, 2012). The third step states that “Wall Street divests itself of mortgage-backed bonds adding to market supply. This leads the market price of mortgage-backed bonds lower” (Green, 2012). The fourth step states that “as mortgage bond prices fall, mortgage bond yields rise. These bond yields are the basis for mortgage rates.” (Green, 2012). Lastly, the fifth step states that “rising mortgage rates increase the inflationary pressure on the U.S. economy.” (Green, 2012).
Since inflation results in lower demand, it causes the prices to fall. As prices fall, the yield rises and that eventually causes higher mortgage types for those buying homes. Another aspect of inflation with mortgage rates is their direct influence on the debt-to-income ratio. Your mortgage rate can determine your debt-to-income ratio. As mortgage rates continue to increase, the cost of your monthly payment is higher than normal which means that you would not have as much cash to spend on other items and luxuries that would otherwise be purchased.
Inflation can change mortgage rates significantly. There are two types of mortgages created just for this cause. The different situations can be chosen by the borrower to which one he wants. There are pros and cons on each.
First one is called fixed interest mortgage. The second is called variable mortgage rate. According to ratehub, the two types of mortgages have different guidelines and rules with them. A fixed interest rate mortgage, the lender assumes the risk in inflation and interest rate and only charge the borrower a fixed interest rate at as listed in the contract. In a variable rate mortgage, the borrower assumes the risk of inflation and interest rate changes. In this situation, the interest rates for the mortgage is dependent on the term as well as market interest rate plus some adjustments as well as market inflations. I still say depend on the term because there are minimum rates in most situation that can not be lower than certain amount. There are also caps of does not matter how high interest rate went, it is maxed out at certain percentage.
In a low inflationary and low interest rate economy, the borrower using variable interest rates are happy since they will pay very low interest payments.
In a heavy inflationary economy with high interest rates, the fixed interest rate borrower is happy since heavy inflation and high interest rate means his current fixed interest is actually a good deal now as newer mortgages will have higher interest rate than him. In this case, the variable interest rate borrower is very unhappy.
As Google reveals that current mortgage averages about 3.99% or around 4%.
Actual cases may vary due to different situation.
Overall, fixed interest rate mortgage, you do not lose much but also not gain much.
For variable interest rate, you may save lots of potential interest expenses but also paying out more interest expenses.
It is a gaming of gambling over future interest rates and inflations.
Question 2: EXPLORING THE WEB – U.S. Bureau of Labor Statistics
Please visit U.S. Bureau of Labor Statistics at https://www.bls.gov (Links to an external site.). Explore the site. What is the purpose of the organization? What information is available to assist you with researching real estate? Bring back something that interest you or that you learned and share it with the class.
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