One of the most important decisions to make when you are buying a home is to time the interest rates just right. Will interest rates increase, in which case you should lock in a fixed rate mortgage for as long as you can, or are they headed down, which means you should either put off buying or refinancing, or choose a rate that adjusts frequently?

The interest rate on your home loan will be influenced by many factors and economic indicators, and having a basic understanding of these will help you make your decision. 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 most important precursor of interest rates is inflation. Inflation is measured by two important indicators called price indicators. These are the PPI and the CPI, the producer price index and the consumer price index.

The Producer Price Index (PPI) measures the changes in producers producers have to pay to produce items. If the prices of raw products increase, you can be sure prices in general will increase.

The Consumer Price Index (CPI) measures changes in prices of a given ?market basket? of consumer goods. Most people are more familiar with CPI because it more directly affects what they pay for goods. Often, to remove some of the volatility of the CPI, analysts will look at core inflation, which eliminates energy and food prices from the formula. The volatile categories of food and energy can affect the inflation rate, while core inflation gives a better measure if overall prices are on the rise, causing inflation.

GDP is another fairly good predictor of inflation as well as interest rates. The Federal Reserve Bank attempts to keep the economy growing at a ideal rate; too slow and production will lag, causing a recession; too fast and the economy may overheat. The Fed therefore intervenes and when the economy is growing too quickly, it will raise interest rates to slow it down, or conversely, lower interest rates to stimulate the economy for more growth.

Another important indicator is the unemployment rate. Low unemployment will typically lead to inflation, since it will lead to higher wages which leads to higher prices. If the economy has high unemployment, interest rates will fall because salaries will fall because employers do not have to offer higher salaries to keep workers. Lower wages mean lower prices which means lower inflation.

Keeping track of these interest rate indicators will help you to decide when it is a good time to enter the mortgage market. Normally, a slow economy with elevated unemployment will mean that rates will be falling. Higher GDP with little to no unemployment means a road to higher interest rates.

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