Interest Rates

Deflation is an economic term that is the opposite of inflation. Deflation may actually sound like a good idea; after all, dropping prices sounds like a good thing. But in reality, it is not. Deflation was the prevailing economic situation of the Great Depression.

During the 1930s, the Federal Reserve Board was significantly less active in manipulating the economy, but in the end, what brought a close to the Depression was the spending brought on by the war. Now, the Fed staves off any prospect of another Depression, or deflationary economy, by lowering interest rates, which in turn stimulates spending.

When the Federal Reserve Board set the Federal Funds Rate at one percent in June of 2003, it was in response to indications of a deflationary economy, the first time this country has seen any such indications since the 1930s.

That one percent rate was the lowest in 46 years, and may well have prevented economic disaster. Instead of suffering through another major depression, what happened was that more people were able to get mortgages to buy homes, and many others took advantage of low rates to refinance. It was a mortgage-seeker’s dream.

In a way, low mortgage rates are a double-edged sword; when rates are very low, it’s likely because the Fed has set them that way because the economy has stalled in some way. But while nobody likes a stalled economy, everybody likes low interest rates.

Of course, mortgage rates are dependent not only on these macroeconomic factors, but on regional, microeconomic factors as well; and banks in different areas may have slightly different current mortgage rates, contingent upon the local economies.

And beyond that, the rate the lender charges each individual will also vary, depending on that person’s individual credit rating and FICO score. But regardless, when mortgage rates are low, everybody benefits, regardless of whether their credit is good or bad.