Making More Money

Inflation is one of the scariest macroeconomic issues that affect people in their daily lives. There are few places where this is more worrying than when folks are thinking about buying or refinancing homes. Fortunately, you can do several things to deal with a home loan in the age of inflation.

Federal Funds Rate

The federal funds rate determines the cost of financing for the banks. When it is low, banks have an incentive to make loans because they can finance consumer debt cheaply. As the FFR rises, that incentive disappears.

Notably, the federal government uses the rate to try to control how hot inflation will get. If there's lots of money floating around the economy, that tends to drive inflation because inflation is just too much money chasing too few assets. When everyone can finance a house cheaply, bidding on home loans goes up.

Why does this matter to you? The federal government will raise the FFR to discourage lending, and the net effect is anyone financing a loan pays more. Likewise, anyone who is already on a variable-rate loan will see their interest rates go up.

Rate of Inflation

The federal government publishes data regarding the rate of inflation, and this includes the rate for housing. As long as your interest rate is lower than the annual change in housing prices, your loan stands a good chance of being a financially beneficial proposition.

Staying Ahead of Inflation

Your takeaway here is that the ideal scenario is to finance your loan below the rate of and the change in housing prices. If inflation is running at 9%, for example, a 7% interest rate isn't the end of the world. You always want to get the lowest interest rate possible from a home loan service provider.

Variable-Rate Loans

There is an argument for taking on a variable-rate mortgage if you're confident inflation and interest rates will go down. This is a bet that your financing costs will drop as the inflation situation improves. However, it carries the risk that interest rates could go higher, especially if the government believes it has to stop future inflation dead in its tracks.

Fixed-Rate Mortgages

If you're worried about controlling the long-term cost of the loan, a fixed rate can lock in your commitment. You should think about this when you're getting your initial mortgage. However, it's not the end of the world if you're currently on a variable-rate loan. You can ask a home loans service firm about converting your mortgage to a fixed rate.