Every time you open a newspaper or turn on the t.v. you are being bombarded with the talk of rising food prices, gas prices, and higher inflation. The last year has seen the Fed slashing interest rates trying to get lenders to lend money and keep the economy out of a recession. You don’t need a degree in macro economics to feel the effects of all this economic manipulating, food prices are up, gas prices are up, every day items like clothes are higher as well as many more. As the Fed cuts interest rates it increases the risk of inflation and in effect lowers the value of bonds. The reason for this is simple, if a bond is paying you 4% and inflation is 5% then you are actually losing money adjusted for inflation, so you of course will demand a higher interest rate on your bond to make it worth investing in.

There are many reasons for all of this manipulating in the economy that we don’t need to get into here and if you really want to read more about the economics of the current economy there are many great blogs out there that will really dive into the details, I like calculatedrisk.blogspot.com

The thing that we are concerned with in the Reverse Mortgage business, and what you should be watching as well, is if the money manipulating by Fed will lead to increased inflation. Inflation is a dangerous problem in economies and the Fed cannot allow inflation to get out of control. The Fed, as one of their mandates, has the responsibility to closely monitor and control inflation. The way the Fed combats inflation is by raising interest rates and strengthening the dollar. This in turn pushes interest rates up on bonds, think mortgages and treasuries, in order to “choke” the excess liquidity out of the markets by making money more expensive to borrow in an attempt to keep prices down. By now you’ve probably noticed how rates on bonds go up when their is inflation and rates go up when the Fed fights inflation, this is the problem with inflation! You really can’t win when it comes to inflation in the economy.

Interest rates on adjustable rate reverse mortgages are at the lowest levels we have seen in years, same goes with fixed rate reverse mortgages. The point here is this, if you are considering a reverse mortgage I would urge you to look at the fixed rate as your reverse mortgage of choice. Although both options eliminate your payments and have many of the same features, going with a fixed rate reverse mortgage, although more expensive right now, may save your a lot of interest in the future.  If the Fed begins to raise interest rates back up in the next year you will see rates on reverse mortgages move up as well. Locking in a fixed rate now and taking advantage of the current economic situation may be the best financial decision you can make.