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Buying a Home: Inflation and Interest Rates

Posted by Twin Cities Habitat for Humanity on 12:15 PM on September 22, 2022

These days, everyone is thinking about inflation. Inflation happens when prices go up for lots of things at once. People notice it most when it affects things they buy every month or every week. Inflation, especially noticeable in food and fuel prices, has a big impact on average Americans.

When inflation happens, the purchasing power of wages goes down. You get less at the store for the same amount of money. One reason for an annual wage increase is that wages need to rise at least as fast as inflation.

In an average year, inflation goes up about 2.3% per month. Today, inflation is over 9% for the 12 months that ended in June, 2022, and it’s causing a lot of people to rethink their plans. But do you really need to put off your goals to buy a home because of inflation?

A Good Interest Rate Reduces the Effect of Inflation

Housing costs include monthly mortgage payments, homeowner’s insurance, and optional mortgage insurance. Homeowners should also save a certain amount for home repairs. How much inflation will affect your budget depends a lot on your interest rate.

The interest rate is the percent of your total loan amount (the premium) that gets converted to interest and added to your outstanding balance every month. The higher your interest rate, the more you’ll pay over time for your home. For a home mortgage, a lower interest rate is always a better deal. The average mortgage lasts 25 or 30 years. Over 30 years, a $120,000 home will cost over $28,000 more at an interest rate of 6.552% than it would with a 5.552% interest rate. If the home costs $240,000, the difference is over $55,000. Check out this advice for first-time homebuyers for more details on obtaining the right mortgage to meet your needs.

Fixed Interest Rates Versus Variable Rates 

A low interest rate isn’t the whole story. To save the most, you need a fixed interest rate mortgage. A fixed interest rate won’t go up or down over time. This usually saves you money in the long run. Interest rates might go up after you get your mortgage, but you’ll be “locked in” at the lower rate.

When inflation goes up, interest rates usually follow. Rising interest rates can make it harder to get a loan. That helps rein in rising home prices. A lower, locked-in interest rate helps you stay at a more affordable level.

The opposite of a fixed-rate mortgage is a variable-rate mortgage. A variable-rate mortgage is usually locked in for a while. After that time, though, it can fluctuate every few months. Before choosing a mortgage, be sure you understand what kind you have. It has a big impact on your money.

Inflation Can Lower Your Housing Costs Over Time

If you have a low fixed interest rate, it can save you money even when inflation is high.

When inflation is high, wages need to go up to keep pace–which unfortunately isn’t always the case. But with a fixed interest rate, you can end up with more money than you started with compared to your housing prices. Housing becomes a smaller portion of your budget because your interest rate never goes up.

Over 30 years, there will be periods of high inflation and low inflation. All in all, though, prices will likely continue to rise in the near future. Right now, a fixed-rate mortgage gives you the chance to be in stronger financial shape as time passes. As you get closer to the end of your mortgage, this can mean an easier retirement. It all begins with the right mortgage for your situation.

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Tags: Homebuyer Tips, First-Time Homebuyer, 2022

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