Understand Today's Economy to Make Smarter Financial Decisions

Almost every business day, some index, rate, or other statistic is released pertaining to the economy. Tough as it can be to make sense of the alphabet soup of different acronyms (GDP, CPI, etc.,) sometimes it’s worth the effort. Not only do these statistics impact the broader economy, but there are times when they should have a direct influence on your personal financial decisions about your home, your mortgage, and your career.

Mortgage Interest Rates: Good

Take the current mortgage situation. According to figures from the Federal Reserve, 30-year fixed mortgage rates rose above 4 percent in June – the first time they’ve been above that mark since October of 2011. How should that impact plans for buying or refinancing a home?

There are two pieces of context that might help answer that question. The first is history. Mortgage finance company Freddie Mac has 41 complete years of mortgage history, and mortgage interest rates have been higher than they are now in 40 of those 41 years.

Job Creation: Better

The other relevant piece of context is the strength of the economy, and here the key statistic is job creation. According to the Bureau of Labor Statistics, 195,000 new jobs were created in June, which is an improvement over the monthly average of 182,000 new jobs during the prior year. Furthermore, in the most recent report, April’s new jobs figure was revised upward by 50,000 to a total of 199,000, and May’s was revised upward by 20,000 to a new tally of 195,000.

Put these pieces of the employment puzzle together, and the resulting picture shows a job market has improved in recent months, was better than previously thought, and has actually been remarkably consistent through April, May, and June.

Making Informed Decisions

So, between 41 years of mortgage data and three months of employment statistics, how does this relate to your financial decisions? Here are some examples of how this economic data might affect your decision-making:

1. Should I buy a home now or wait? Most first-time buyers have only been following the mortgage market for a short time. From this perspective, it would be easy to think that with 30-year fixed mortgage interest rates recently rising from 3.35 percent to 4.29 percent (according to the most recent Freddie Mac data), the immediate opportunity has been missed and it might be wise to wait for them to dip again. Knowing the economic context might change that thinking: even at 4.29 percent, rates have hardly ever been lower; a strengthening job market is likely to push rates higher; economic improvements could also support the rally in home prices. In short, the opportunity may not have been as good as it was a couple months ago, but that doesn’t mean it is likely to get any better.

2. Should I refinance? The primary issue here is a comparison between your current mortgage rate and the available refinance rate. If you could save money by refinancing, you win – and the mortgage and economic context describe above suggest you should take that opportunity while you can, and not hold out for a better one. If mortgage interest rates continue to rise, your refinancing window could close very quickly.

3. Fixed or adjustable rate? Again, the contextual signs point towards a rising interest rate environment. Therefore, unless you have a very special set of circumstances, a fixed-rate mortgage seems to be indicated.

4. Is this a good time for a home equity loan? Home prices are up over the past year, and while home equity rates are also higher, they are still relatively low. That combination suggests this might be time to pull the trigger if you’ve been thinking about a home equity loan – after all, if new purchase and refinance rates rise, you can expect home equity rates to rise along with them.

5. Should I relocate? Maybe you’ve been offered a job opportunity in new area, or maybe you’re just frustrated with the employment prospects where you are now. Would moving be a good idea? It depends a great deal on where you go. According to state-by-state employment data from the Bureau of Labor Statistics, unemployment rates across the 50 states range from a low of 3.2 percent to a high of 9.5 percent. In other words, you are almost three times as likely to be unemployed in some states than in others. If you are considering an opportunity to relocate, make sure you look before you leap by checking out the job market in the area where you are headed. Even if you have a job lined up, this may save you from getting into a situation where job security is a little shaky.

Many details of the economy are somewhat confusing – even to economists. However, the broader trends, such as whether interest rates are rising or falling, and whether more or fewer new jobs are being created, are worth paying attention to. They can make the difference between making a decision you regret and making an informed decision you look back on with satisfaction for years to come.

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