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How Unemployment Affects Interest Rates (And Why)
If you’re like most consumers, you’ve probably been taught that unemployment is a bad thing. A very bad thing. And in many ways, that’s true: Unemployment decreases sales of all types of products and consistently high levels of unemployment can place a real drag on the overall economy. And, of course, unemployment is especially bad for those who find themselves without a job.
But, all that being said, there is one up side to a relatively high unemployment rate, at least for those who are lucky enough not to be part of that statistic: Because unemployment can result in a sluggish economy, the Federal Reserve Board often opts to lower interest rates or at least to maintain existing low interest rates to stimulate spending – and that can be a real benefit to those shopping for a mortgage.
Important to know: Unemployment rates and interest rates are usually inversely related.
That means that when unemployment is high the Fed often chooses to keep interest rates low, hoping businesses will find the availability of low-interest loans an incentive to invest in their businesses, which in turn will hopefully increase the number of available jobs and decrease unemployment. Similarly, lower interest rates often result in a higher rate of borrowing – and hence, spending – among consumers; that increase in demand can also cause businesses to hire more workers, again resulting in a lower unemployment rate. Conversely, when the unemployment rate is low, the Fed may move to increase interest rates to avoid inflation.
You can see a recent example of the relationship between unemployment and interest rates in the recent decision by the Federal Reserve Board (or “Fed,” if you want to sound cool) to maintain low interest rates following May’s rather disappointing unemployment statistics: Rather than decreasing or remaining stable as many experts had predicted, the unemployment rate increased from 7.5 percent to 7.6 percent. The Fed, in turn, decided to keep interest rates at their current low levels – for now.
In previous statements, the Fed has said it will likely keep interest rates low until the unemployment rate hits 6.5 percent; however, that’s definitely not something that’s written in stone. The Fed meets eight times a year, and at any of those meetings the board may decide to increase interest rates with no warning. So what’s the lesson here? Never put off until tomorrow what you can do today. There’s no time like the present. Strike while the iron is hot (actually, that has to do with shoeing horses and not with interest rates, but you get the idea).
In plain, 21st-century English: Interest rates are low now – they may be higher after the Fed’s next meeting.
To make sure you don’t miss out on locking in today’s low, low rates, apply for a mortgage or refi ASAP so you can potentially save tens of thousands of dollars over the life of your loan.