Inflation is an important economic concept that can have a big impact on homebuyers. So what is inflation, and how can it affect your home purchase? Here's what you need to know:
What is inflation?
Inflation is a measure of how much prices for goods and services are rising over time. It's typically measured as an annual percentage increase in the Consumer Price Index (CPI), which tracks the prices of a basket of goods and services consumed by households. When prices rise, the value of money decreases – in other words, it takes more money to buy the same goods and services as before.
What causes inflation?
There are many factors that can contribute to inflation, including:
Increased demand for goods and services: When demand for goods and services outstrips supply, prices can rise. This is often the case in a strong economy, when people have more disposable income and are willing to spend it.
Increased production costs: When it costs more to produce goods and services, companies may pass those costs on to consumers in the form of higher prices. This can be due to rising labor costs, raw material costs, or other factors.
Increased borrowing costs: When borrowing costs go up, it can lead to higher prices for goods and services. This is because businesses and consumers may have to pay more to borrow money, which can lead to higher costs for products and services.
How does inflation affect homebuyers?
Inflation can have a number of impacts on homebuyers:
Higher mortgage rates: When inflation is high, it can lead to higher mortgage rates. This is because investors demand a higher return on their investments to compensate for the fact that their money is losing value due to inflation. Higher mortgage rates can make it more expensive to buy a home, as you'll have to pay more in interest over the life of the loan.
Higher home prices: Inflation can also lead to higher home prices. When prices for goods and services are rising, it can put pressure on homeowners to raise the price of their homes to keep up with inflation. This can make it more difficult for homebuyers to afford a home, especially if they are trying to save for a down payment.
Increased closing costs: Inflation can also affect closing costs, which are the fees associated with buying a home. These fees can include things like title insurance, appraisals, and inspections. If inflation is high, it may lead to higher costs for these services, which can add to the overall cost of buying a home.
What can homebuyers do to protect against inflation?
There are a few things homebuyers can do to protect themselves against the effects of inflation:
Shop around for the best mortgage rate: At 14 Days To Close, we help you compare rates from multiple lenders to find the best mortgage for your needs. By shopping around and comparing rates, you can potentially save thousands of dollars over the life of your loan.
Consider a fixed-rate mortgage: A fixed-rate mortgage locks in an interest rate for the life of the loan, which can protect you against rising rates due to inflation.
Build an emergency fund: Having a solid emergency fund can help you weather any financial storms that may arise due to inflation. Aim to save at least three to six months' worth of living expenses to give yourself a cushion.
Invest in your home: While it's not always possible to control the market, you can make your home more valuable by investing in home improvements. This can help you keep pace with rising home prices due to inflation.
Understanding inflation is an important part of the homebuying process. By staying informed about the factors that can affect inflation and the ways it can impact your home purchase, you can make more informed decisions and protect yourself against potential financial risks. By shopping around for the best mortgage rate, considering a fixed-rate mortgage, building an emergency fund, and investing in your home, you can take control of your finances and pave the way for a successful home purchase.