One of the most important decisions to make when you want to a home is to time the interest rates exactly right. Those who think rates will increase want to buy now and take advantage of currently lower rates, and those who think they will decrease want to wait until a more opportune time.

How are these interest rates determined in the first place, and will understanding this help in the decision making process? Interest rates are actually the price of money, and just as the law of supply and demand dictates price, the law of supply and demand will influence the price of your mortgage: its interest rate.

The inflation rate, which indicates the supply of money, is the first and most critical factor in interest rates. Inflation is measured by two primary indicators called price indicators. The PPI (Producer Price Index) and the CPI (the Consumer Price Index).

PPI or Producer Price Index is a measure of changes in prices at the level of production. If PPI is rising, this will mean that the cost of finished goods is higher, which mean inflation.

CPI, or Consumer Price Index is the difference in prices at the consumer level, as measured by a standard basket of goods. This is a very critical signal of inflation since it is what we will all pay for our purchases. The basket of goods used is indicative of the kinds of goods consumers frequently buy, and because it includes food and energy prices, which can move up and down too much, they are frequently taken out of the equation. This leaves what is considered the ?core? inflation rate which is a better indicator of general prices and inflation.

GDP or Gross Domestic Product also predicts inflation and consequently interest rates. The Federal Reserve Bank tries to keep the economy on a smooth level, with neither too much nor too little growth, which respectively result in inflation or recession. The Fed has some tools to influence interest rates and will use them to increase rates when it wants to slow the economy down and decrease them when it needs to help the economy to pick up.

The unemployment rate also has an impact on interest rates. If unemployment is low, the resulting increased wages will be an inflationary influence. High unemployment usually leads to lower interest rates over time since employers can keep wages down since there are so many candidates for each job. Lower wages equal lower prices which equals lower inflation.

If you are thinking about a mortgage, it is to your advantage to watch these indicators to target the best timing to enter the loan market. Normally, a slow economy with high unemployment will mean that rates will be falling. Increasing GDP and reduced unemployment means the economy is heating up and you can expect increased interest rates in the future.

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