What is the Velocity of Money and How Does it Impact Home Loan Rates?

By Travis Newton, Sr. Mortgage Banker, Preferred Mortgage

If you’ve been watching the economic news, you’ve probably noticed that market experts and traders have been keeping a close eye on the Commerce Department’s Personal Spending and Personal Income reports. Obviously, those reports provide insight into the health of our economy, but did you know they also influence home loan rates? That’s right, personal spending can actually influence the interest rates that are available when you purchase or refinance a home. People’s personal spending habits are all over the place, some can be predictable, whilst others will have a pattern and then veer off due to specific wants and needs. For example, they may frequently save but might one time decide to visit a website like oxi.casino to place a few bets and see if they are able to win some money, which in turn could help them with accruing a mortgage, however, this is just an example of how people can change up their spending habits.

Here’s why. It has to do with something called the velocity of money. Even though the government keeps pumping money into the system, nothing happens until that money is spent or lent – and passes from one hand to another or one business to another.

The speed at which this money passes between parties is called the velocity of money.

With the job market still very sluggish, consumers aren’t spending much money these days, and businesses are still reluctant to spend money to make investments in their businesses. Owing to this, many individuals may decide to take up the money offered by leading online loan providers (visit https://www.fatcatloans.ca/loans/online-loans for a better understanding) to get a temporary stability at least. With the present velocity at low levels, inflation remains subdued and that’s good for home loan rates. That’s because rates are tied to Mortgage Bonds and inflation is the archenemy of Bonds, so low inflation is good for Bonds and rates. However, once velocity increases, the excess money in the system will cause inflation – which is bad for rates, since even the slightest scent of inflation can cause home loan rates to worsen.

While we certainly want to see better economic recovery news in the near future, we have to remember that there’s an inverse relationship between good economic news and Bonds and home loan rates. Weak economic news normally causes money to flow out of Stocks and into Bonds, which helps Bonds and home loan rates improve. Strong economic news, on the other hand, normally has the opposite result.

Currently, home loan rates are at a historically low level (please see rates below), but that situation won’t last forever. That means now is an ideal time to purchase a home or refinance before the velocity of money – and rates – change. If you or anyone you know would like to learn more about the current economic situation and how to take advantage of historically low home loan rates, then please contact me.

Call me at 503-931-4490NMLS 15261/NMLS-269195