Special offer

High Oil Prices and Mortgage Rates

By
Mortgage and Lending NMLS License #113781

Oil closed at an all-time high this week. 

Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.

When consumers have to spend more money for the same amount of product, it's called "inflation". 

Another way to look at inflation is like an erosion in the value of a dollar.

The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars.  If those dollars are losing their value, the rates tied to those debts have to increase to "cancel out" the erosion.

This is one reason why mortgage rates spiked Monday (see my other blog entry for a more detailed reason for rate changes in the mortgage market).  As oil prices rose, the fear of inflation grew larger.

Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices.  As oil prices rise, mortgage rates should, too.  As oil prices fall, mortgage rates should follow.

Comments (3)

JDo Doe
Barrington, RI
Lets all do a 'oil dance' that the price/barrell drops below $1 again.
Mar 08, 2008 04:37 AM
Adam Brett
The Adam and Eric Group - Fullerton, CA
The Adam and Eric Group, Fullerton's Finest
I like your blogs - simple and to the point.  
Mar 08, 2008 04:42 AM
Eric Kodner
Wayzata Lakes Realty: Eric Kodner Sells Twin Cities Homes - Minnetonka, MN
Wayzata Lakes Realty: Twin Cities, Madeline Island
It's not likely that OPEC will allow the price to fall.  They are taking it out on the U.S. because of our housing crisis and the fact that foreign nations are left holding quite a bit of our paper investments which may turn out to be devalued or even worthless. 
Mar 08, 2008 04:42 AM