What is Inflation and What Does it Mean for Mortgages?

If you have tuned into the news recently, talks of COVID are slowly eroding away, now being replaced by a new concern: inflation. Rising has caught the attention of expert economists all over the world over the last few months.

According to the U.S. Labor Department, hit a staggering new 40-year high in May, rising economic concern across multiple sectors.1 Gas prices, groceries, as well as other consumer goods have all seen price increases over the past year.

Now mortgage and professionals are especially concerned with how inflation will impact borrowers given inflation’s historically reciprocal relationship with interest rates.

If you have been thinking about buying a new house or refinancing your existing home loan, here is how inflation can impact you and your new financing.

The Relationship Between Inflation and

If you have ever purchased gas at the pump as a quick fill-up for your car, you probably have noticed at one point or another that the price per gallon has gone up a few cents (or few dollars) compared to the previous year.

There could be many factors contributing to smaller, incremental changes in the price of gasoline, but long-term increases could be the cause of inflation. In fact, inflation is simply a measure of how much goods and services increase over time (typically a year or more).2

Economists often measure inflation by analyzing consumers’ cost of living. One of the ways inflation becomes an issue is if wage growth does not keep up with price increases. In fact, this can be dampening for those looking to buy a home.

One of the key impacts of inflation is that it lowers your purchasing power in a couple of ways. First, inflation makes your money worth less. You will have to spend more money to purchase the same goods and services you have before.

This can be quite discouraging if your goal has been to save up enough money to purchase a new home because inflation may inhibit your ability to put extra money aside and save. It can also make that same home you had your heart set on, much more expensive.

Another key way inflation reduces your purchasing power is by prompting quantitative tightening by the federal government. One way to combat inflation is to raise the benchmark interest rate. The higher this rate is, the more expensive it is to borrow money, which encourages people to save.

The Federal Reserve recently increased by three-quarters of a percentage point to curb concerns about rising inflation.3 As it becomes more expensive for financial institutions to borrow money and as demand for mortgage-backed securities falls, these entities often raise rates and shift the costs onto consumers.

are already on an upward trajectory, jumping two percentage points since the start of the year.3 As inflation prompts additional rate hikes by the government, rates may continue to go up making it harder to afford a new mortgage loan.

Choosing to get a new home mortgage now could be a smart move considering the likelihood of future rate hikes if you can lock in a fixed rate. If you have the means, you may even want to consider buying down your rate by paying discount points.

For those on the fence about refinancing, it’s important to consider the type of mortgage product you are currently in. Adjustable-rate and home equity loans are much more susceptible to rate changes, meaning you could see your payment jump when it comes time for your interest rate to adjust.

Refinancing can also help you switch to a fixed-rate mortgage program or even help you consolidate multiple that may have a variable rate.

In general, has historically been considered a good investment to hedge against inflation. For example, if rates go up, most of the time your existing mortgage payment will stay the same. For the same reason, those investing in real estate can raise rents to help offset costs.

The Bottom Line

Coming out of a major pandemic, the U.S. recovery is continuing to experience headwinds as higher levels of inflation are making it less affordable for households to afford basic goods and services.

What’s more concerning is that inflation could have a big impact on your ability to buy or refinance a home mortgage. Not only can it erode purchasing power, but higher inflation can also prompt higher interest rates.

While it’s true that continues to be a great investment tool to hedge against inflationary concerns, many borrowers may find it challenging to buy a home with borrower costs becoming more elevated.

In fact, the Federal Reserve is poised to keep rates high for the foreseeable future. If you can afford to buy or refinance, now might be the perfect time before borrowing conditions get even more expensive.


1 Associated Press. (2022, June 10). U.S. inflation hit a new 40-year high last month of 8.6 percent. POLITICO. Retrieved June 18, 2022, from https://www.politico.com/news/2022/06/10/inflation-new-high-may-00038786#:%7E:text=America’s%20rampant%20inflation%20is%20imposing,for%20food%2C%20gas%20and%20rent.

2 Oner, C. (n.d.). Inflation: Prices on the Rise. International Monetary Fund. Retrieved June 18, 2022, from https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm

3  Bernard, T. S. (2022, June 16). What the Fed’s Rate Hike Means for Mortgages. The New York Times. Retrieved June 18, 2022, from https://www.nytimes.com/2022/06/15/business/economy/fed-rate-increase-mortgage.html

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