One of the most critical choices to make when you want to a home is to time the interest rates just right. If you think interest rates are going to increase, you will want to lock in a lower rate now, but if you think rates can still fall considerably, you may want to wait before you commit to a mortgage.

What determines interest rates depends on a lot of factors, so knowing what they are and how they behave can help you make your decision. The price of money is interest rates, and if you understand what will affect the price of money, you will know better what affects interest rates, which includes your home loan rate.

Inflation is one of the most important factors in interest rates. Inflation is measured by two important indicators called price indicators. The Producer Price Index and the Consumer Price Index are the main two factors.

The Producer Price Index (PPI) measures the changes in the prices producers have to pay to produce items. Consistently rising PPI, which raises prices of finished goods, will render all goods more expensive and lead to inflation.

The Consumer Price Index (CPI) measures the change in prices of a fixed ?market basket? of consumer goods. This is a very important signal of inflation since this is what we will all pay for our purchases. Certain segments of CPI can ?skew? the percentages, so analysts frequently remove changes in food and oil prices, which are often too volatile. This leaves what is considered the ?core? inflation rate which is a better indicator of overall prices and inflation.

GDP or Gross Domestic Product also is a predictor of inflation and therefore interest rates. The Fed (Federal Reserve Bank-the Central Bank of the United States) is responsible for maintaining the economy on an even keel-not a lot of growth, which will cause inflation and not too little, which may cause a recession. The Fed has certain tools to control interest rates and will use them to raise rates when it needs to slow the economy down and decrease them when it needs to help the economy to pick up.

An additional important indicator is the unemployment level. If unemployment is down, the resulting higher wages will be an inflationary influence. If the economy has high unemployment, interest rates will go down because salaries will fall because employers do not have to offer higher salaries to keep workers. In other words, increased wages lead to a wage price spiral and decreased wages bring prices down.

The prospective home buyer can help himself by watching these indicators to try to determine rates. The rule of thumb is that a slow economy with elevated unemployment will mean that rates will be falling. Increasing GDP and low unemployment means the economy is heating up and you can expect increased interest rates in the future.

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