Know When To Get A Loan By Tracking Interest Rates

Many people both consumers and investors wonder when is a good time to refinance a house, get a car loan, buy bonds, etc.  While there is a lot that goes into the equation one of the primary things that affect the price and value is the level and overall trends in interest rates.  Lets look at a few examples of times when it is useful to know the trend in interest rates.

In 1980 housing prices suffered quite a bit.  Was it due to massive leverage or excess speculation?  No, it was caused by hyperinflation and the extremely high interest rates that followed.  Paul Volcker was in charge of the Fed and raised rates several times in order to tame the runaway inflation.  In the process of raising rates however, home values plummeted.  They went down because as money got more and more expensive to borrow, the prospect of borrowing money to buy a home became less and less appealing.

As interest rates climb higher the appeal of many assets starts to lose its luster.  If the cost of financing a home doubles, it is likely that you will not want to buy a new home or car.  In fact if rates are going up then just about everything goes down, or at least stalls out.  Take bonds for instance, if rates go up bonds go down.  This relationship holds true on the other side as well since bonds go up when rates go down.

These are all reasons that people and investors should be following interest rates.  So where do we find these interest rates?  And which rates should we be looking at.  Well there are several sites like Bankrate, Bloomberg, Stockcharts, and even the Wall St Journal that have interest rates and charts of these rates so that you can see the direction of the prevailing trend.

Look at the 90-Day Treasury bill yields for an assessment of what the Fed is doing.  If T-Bill yields have been going down then money is getting cheaper and it makes sense to start looking to be a buyer.  If on the other hand T-Bill yields are going up you will likely want to either postpone any large purchases or possibly get ahead of the curb and sell your home while the price is still high, as it will be harder to sell as rates get higher and higher.

Another important interest rate is that of LIBOR.  Many consumer loans are tied to LIBOR and so it is a helpful gauge when tracking rates.  A typical loan might be LIBOR plus 2 points meaning that the interest rate of the loan will be the LIBOR rate +2.  Obviously if LIBOR is trending higher it means that money is getting more expensive and it is probably not a good time to be buying.  When LIBOR is declining it means that money is cheaper and your financing costs will be lower.

Hopefully this has been helpful for you.  By determining the trend in interest rates you can be far better prepared to know when to buy, when to sell, and when to do nothing.  Why fly blind when you can take the global macro view and know what is going to happen.