Mortgage Rates Responding To Rising Gas Prices?

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Political unrest across the Middle East has oil prices on the move. Crude oil raced past $110 per barrel last week, a 38 percent increase since just 5 months ago. Gas prices are rising, too -- up 26 days in a row nationwide.

For mortgage rate shoppers, it adds up to bad news at the pump, and at the bank. Rising oil prices are linked to higher mortgage rates.

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Higher Oil Prices Lead To Higher Mortgage Rates

When oil prices rise, they tend to take mortgage rates with them. We've seen it time and again throughout history. The link is a natural one, too -- it's tied to inflation.

First, oil prices rise. This can happen for any number of reasons:

1. Demand for oil increases because of expanding economies
2. Supply of oil falls because of reduced drilling capacity, or abrupt disruption
3. The U.S. dollar loses value (because oil is bought/paid for using U.S. dollars)

As oil prices rise, so does the cost of "doing business".

This should be intuitive -- energy costs are an input for manufactured items, and just the cost of keeping the lights on all day goes up when oil prices rise. Before long, business profits shrink.

Meanwhile, as this is happening, homeowners start to experience rising heating and cooling costs, plus higher prices at the gas pump. Furthermore, food costs rise because it's more expensive for food producers to get food from the farm to the supermarkets. Disposable income shrinks.

Before long, the cost pressures on business and households converge. To make up for rising costs, businesses raise prices and households demand higher wages. This cycle is self-perpetuating and costs move ever higher.

This, my friends, is inflation and inflation is awful for mortgage rates.

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Gas Prices Are Rising. Lock Your Mortgage Rates.

According to government data, core inflation is up just 1.9% from last year, well within the Fed's "target range" and low enough to warrant holding the Fed Funds Rate near 0.000% until at least 2014.

However, although prices remain tame, the next inflation cycle has already started.

This is because the Federal Reserve has created for the U.S. economy an ideal, expansionary environment. 

1. A 0.000% percent Fed Funds Rate
2. More than a trillion dollars worth of bond market support
3. A unwavering message that the Fed Funds Rate will stay low for "an extended period"

And now, with gas prices rising, the cycle gets a boost. Mortgage rates for all loan types -- FHA, conventional, USDA and VA -- should rise in the next few days. Even jumbo loans.

If you've been shopping, consider cutting your losses today. Lock your mortgage rate and get a move on.

Click here to get today's mortgage rates.

Your Next Step : Get A Rate Quote

The Federal Reserve is closely watching inflation, and has been. Rising costs concern Fed Chairman Ben Bernanke to the point that he suggested a third round of quantitative easing may not be necessary.

Remember : Markets had taken QE3 as a foregone conclusion.

Click here to get today's mortgage rates.