Will falling oil prices mean lower mortgage rates?

Posted by  on Jan 27, 2015

Q: Will low oil prices help mortgage rates go even lower in 2015?

A: It is an intriguing thought, because low energy prices can play a role in keeping mortgage rates down. However, it may be that today's mortgage rates have already benefitted about as much as possible from falling oil prices.

The relationship between oil prices and mortgage rates has to do with inflation. Mortgage lenders need to earn a cushion over the rate of inflation; so as inflation goes up and down, lenders will adjust their rates accordingly. Oil can be a significant component of inflation.

In that context, it is easy to see how falling oil prices have helped keep inflation -- and thus mortgage rates -- low. The Consumer Price Index (CPI) rose by just 1.3 percent for the year ending November 30, 2014, thanks largely to the fact that the fuel oil and gasoline components of the CPI fell by double-digits over the same period. Outside of energy, the CPI was up 1.9 percent, so falling energy prices dragged inflation down by an extra 60 basis points, creating additional room for mortgage rates to fall.

Looking to the future, you have to ask yourself a couple of questions about whether mortgage rates will continue to fall. First, after peaking in June, the price of a barrel of oil had fallen by nearly 50 percent by late December. With oil having already fallen so far, can you really expect it to continue with a similar rate of decline in 2015? Second, how confident will mortgage lenders be about lower oil prices? Lenders have seen the ups and downs of oil enough not to lower rates too much in reaction to what may be a temporary downward spike.

In short, conditions have already been about as favorable as possible for low mortgage rates. If you have an opportunity to refinance or to buy a home, it may not be wise to hold out for even lower rates.

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