If you are considering buying a house or refinancing your present home, you probably are wondering if this is the right time. Will interest rates go up, in which case you should lock in a fixed interest home loan for as long as you can, or are they headed down, which means you want to either put off buying or refinancing, or choose a rate that adjusts frequently?

The interest rate on your home loan will be influenced by many factors and economic indicators, and having a basic understanding of these will help you in your decision. The first thing to realize is that interest rates are actually the price of money and like all prices, they are influenced by supply and demand.

The inflation rate, which indicates the supply of money, is the first and most important factor in interest rates. The inflation rate has two primary indicators. The Producer Price Index and the Consumer Price Index are the primary two factors.

PPI is the measure of differences in prices in a given length of for goods at the production level. Consistently rising PPI, which raises prices of finished goods, will make all goods more expensive and lead to inflation.

CPI is the measure of the change in prices at the consumer level, measured as a group of items. CPI is more well known to most people because it shows whether the prices we are paying are rising or going down, and by how much. Certain segments of CPI can ?skew? the percentages, so analysts frequently remove changes in food and oil prices, which are often too volatile. The remaining items form the core inflation rate, which will tell us how prices will perform in the future.

GDP is another relatively good predictor of inflation and interest rates. The Federal Reserve Bank attempts to keep the economy growing at a ideal rate; too slow and production will lag, which causes recession; too fast and the economy may overheat. The Fed has some tools to control interest rates and will use them to increase rates when it needs to slow the economy down and decrease them when it needs to help the economy to pick up.

The next very important interest rate indicator is the unemployment level. Low unemployment is considered inflationary since employers have to chase after too few candidates, and will raise wages to do this. If unemployment is up, the resulting decreased wages will mean lower inflation. In other words, increased wages lead to a wage price spiral and decreased wages bring prices down.

If you are thinking about a mortgage, it is to your advantage to watch these indicators to target the best timing to enter the loan market. A general rule is falling GDP and increasing unemployment will lead to lower interest rates. Increasing GDP and reduced unemployment means the economy is picking up and you can expect increased interest rates in the future.

You have a lot of choices to make in buying a house and deciding upon a home loan, and in today’s confusing loan world, you now also have to decide upon the index that you want for your Adjustable Rate Mortgage (ARM).

The index of an ARM (Adjustable Rate Mortgage) is the financial standard upon which the adjustments will be made. Indices used include the CD rate, the Treasury Bill rate, the Fed Funds rate, the LIBOR rate and, the new kid on the block, the options ARM.

The basic concept of an ARM is that the interest on the loan is adjusted up or down, periodically, based on a chosen signal interest rate that is indicative of interest rates in general. One such instrument would be Certificates of Deposit-your loan rate would go up and down with the CD rate. Adjustable rate mortgages have adjustment caps, which says that the interest rate can only be adjusted at certain periods, even if the underlying interest rate goes up more often; this can be an advantage if you just readjusted and then rates move up. But be aw are, however, that if you just readjusted at a higher rate, and your index rate falls, you are stuck with the higher rate until the next adjustment period.

ARMs can be tied to a lot of underlying instruments, such as the 90 day U.S. Treasury Bill. The Fed Fund rate is the rate banks pay to the Federal Reserve Bank for funds. Many of the international lender will use the LIBOR as the index rate for loans.

How you decide upon the right index is dependent upon your particular circumstances and how you believe interest rates will change. CD ARMs adjust every six months, for example, and therefore react more readily to interest rate changes. Rates on Treasury instruments such as the Treasury Bill change more slowly than CDs, and so will react more less to interest rate changes. LIBOR is the index that moves the most often and the most rapidly, so if you want to take frequent advantage of the downward level of lowering rates, this is the one for you.

But in addition to these standards, new products are always been introduced on the mortgage market; an example would be the option ARM, that will let a borrower decide how much mortgage he is going to pay each month! The options that are offered represent interest-only payments, and a minimum payment that can’t be less than the interest-only payment. Be warned that minimum payment option can result in an increasing, rather than decreasing mortgage, a phenomenon known as negative amortization.

There are so many choices in the home mortgage market today that the new home buyer should not attempt to cover this field by himself but should instead call a certified mortgage consultant.

In bygone days, there was basically only one kind of home loan, a conventional, fixed rate, term mortgage.

The world has changed, and now a hopeful borrower has to choose between different types of mortgages, such as fixed or variable rate. Fixed rate mortgages usually carry higher rates than variable rate loans. There is a chance of the rates going higher, increasing the bank’s cost of money when they fix a rate for a long period. So they have to build in a cushion in case of increased rates.

If you can afford the higher interest rate, a fixed rate home loan makes sense since you now have protection against rising interest rates. But for it to be advantageous, you should plan on having your home for ten or more years. If the home will only be owned for five or so years, the higher rate will not amortize over the loan.

If you feel you will not be in the same home for ten years or so, the adjustable rate market is probably a better choice. Adjustable rate loan payments are lower and future increased rates are not an issue, since when the loan is paid down, this situation would be the same.

To confuse the borrower more, he now has to pick not only whether he wants a fixed or variable rate, but also the index upon which the rate will be determined, and what the interest rate cap and maximum interest rate will be.

Lenders will also offer you a lock in period, so it is that you know how soon you are going to be buying a house. The lock in period is a device that permits you to lock in for a rate and maintain it at that level for a set period. The longer the lock in period, the higher the interest rate will be.

Now you have to decide upon a down payment. In many cases, there is not much to think about, since the buyer will put down as much as he can afford. If you are one of the fortunate ones with cash to spare, however, you have to make the comparison between how much the additional funds would earn in comparison with the benefit they gain for the mortgage interest rate.

The next option a borrower has to decide upon is how many points he wants to pay so that he can lower the interest rate. How long a mortgage is held will be a big factor here as well, because the cost of the points has to be spread out over the term of the loan.

Pity the poor home loan borrower these days, with too many choices to make. And new choices come on the market all the time, like interest only loans and option based loans, giving us even more confusion in the home loan process.

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There is not a great deal of difference between first and second mortgages except that one is usually taken out when a home is bought, and the other is taken out on the remaining balance of the first home loan.

Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate consumer debt.

If you are thinking about taking out a second mortgage for home improvements, you should make sure you are going to get that additional value. Adding a bedroom, or renovating a kitchen are projects that have proven to make a home more valuable since these are items that new home buyers look for.

Some home improvements, however, are nothing more than luxuries and will not affect the future value. An in ground pool is an example that is frequently used, since there are many buyers (with young children, for instance) who would not care to have one.

Reducing high interest rate debt is another good use for a second mortgage, as long as you are able to keep your total costs down. Typically, a homeowner would want to pay down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%.

But be sure you use the loan for its intended purpose, and don’t “forget” to pay down those expensive consumer loans.

Second mortgages are just that in actuality as well as in name, because they are paid down after the first home loan is paid, and the lender has to hope there is equity to cover it.

For this reason, rates on second loans are higher because the bank has that risk, and the chance of default is higher.

Second mortgages have closing expenses, so you should be careful about them and make sure that they do not render the second mortgage so expensive that it does not balance out the savings you believed you would have.

Since a first mortgage is for a substantial portion of the value of the home, it is for a greater amount than a second mortgage, so the closing costs are spread over a greater amount. The effect of the closing costs on a smaller second mortgage can be significant. It is also important to shop around for a second mortgage since rates on these mortgages can be very different from bank to bank.

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Obtaining a mortgage to purchase a home can be an expensive proposition. Nevertheless, buyers who have been through this are sometimes tempted to re-finance their mortgage at a lower rate, not thinking about how much the closing costs will add to the re-financing.

Banks, of course, incur expenses to process and close a loan. A lot of these expenses are not under the control of your bank, since they are charged by third parties, but there are some fees that they do control, and will adjust if they really want your business.

or inspections -Title search -Credit report

Or more, depending upon the state.

One of the first questions you may ask is whether or not you can reduce these costs. In certain markets, banks may be willing to reduce or eliminate fees that they themselves charge, such as application fees. But many of the fees involved in the closing of your mortgage are not under the control of the bank, such as the appraisal fee, the legal fees, etc.

The first step you should take to find out whether you can reduce you closing costs is to get a good faith estimate of the costs. Be careful that your bank has not offered you a great loan rate, but then padded the closing costs to such an extent that they recover the difference.

One of the most effective ways to get fees reduced is to find out the closing costs at your bank’s competitors and you can ask your bank to lower them if they seem too high.

Once you have whittled the closing costs as much as you can, make sure the deal is still worthwhile. Using a mortgage calculator found on the net, you should be able to figure how much you will pay on your present loan and how much you will owe over time with the re-financed loan.

Now compare your existing home loan total cost balance against the new loan’s total costs, adding the closing costs to your new loan. Now you will know whether the lower rate is worth while. You will discover that this exercise is well worth the time and trouble.

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If you are shopping for a home loan, you of course want the best possible rate. This is a decision that you will live with for many years. How do the banks determine the rate they quote you in the first place?

And once you know how those rates are determined, is there something you can do to get the best rate for your mortgage?

The one item that has the most impact on the level of the interest rate is the credit rank of the borrower. This is an issue that is in the headlines all the time, and everyone who is looking to buy a home is concerned about their “FICO” numbers.

If you have wondered what a FICO score is, it is a number that credit companies assign to a person’s credit standing. Banks all use the services of these credit rating agencies to find out the probable risk of lending to a borrower and the criteria the agencies use are history of payments, exposure to debt, income, job history, etc.

The next determinant that will influence your interest rate is the size of the down payment you are putting on your home.

First of all, you are putting your own funds into the project; this gives the bank confidence that you are confident enough in paying back the mortgage that you have committed sizeable upfront funds as a down payment.

Even though a higher down payment will help with the rate, there are other factors. The problems most home buyers have, however, is deciding between saving the deposit and continuing to pay rent. The longer you pay rent, the longer you can wait and save the money for the down payment, but couldn’t rent money just as well be a mortgage payment?

The “term” of the mortgage is also an important component in how rates are determined. The longer a bank has to be committed to the risk of your home loan, the more they want to be rewarded for taking that risk.

This is why you will typically see short term loans at a lower rate than a 25 or 30 year mortgage. The downside to this concept is that, if rates are on the rise, you will have to pay more each time you renew your short term mortgage, instead of having a steady rate for 25 years.

And here is another factor that will determine interest rates, one you can do nothing about: that is the interest rate market. Since lending institutions have to borrow on other markets in order to lend mortgage money, the cost of their money goes up and down. Whether interest rates will go up or down is a subject under constant study and discussion by economists.

Most people would rather take a chance on a fixed rate that can’t increase, than a rate that changes periodically. Even if rates go down, they feel the risk is better to have a locked in rate than a changing rate.

The last factor that can influence the rate on your loan is the size of the loan itself. There are some rules that limit the amount of the loans a lender can offer, and if your loan is higher than these limits, you will have to pay a higher rate.

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One way of making sure you can keep up with your mortgage, is to choose a mortgage program that meets your needs and lifestyles. Making the payment easier will make it more likely it will be paid, and paid when it should be.

There are many people who don’t pay their mortgage on time simply because they are too busy and should look into online banking or automatic payments. This is not an option if you are just barely paying the mortgage, only if you are struggling to find the time to pay it because your life is so busy.

You might even find an added benefit, since many lenders will lower the interest rate on a mortgage if the payment is automatically deducted. Their processing costs can be lower, and they are guaranteed that the loan will be paid, so they can pass some of those savings on to the borrower.

Another problem many homeowners face is coming up with the full mortgage payment at once. If you are like most consumers, the funds sitting in the checking account gets used up on other things and when the home loan is due, there is not enough there. A solution a lot of folks like is to pay one half of the loan in the middle of the month when one paycheck is received and the next half when the second check of the month is received.

Matching the due dates of their home loans with the receipt dates of their salary helps many people budget their mortgage better. A great bonus of this type of program is that the mortgage is reduced much more quickly, making total payments on the loan lower.

Another product that banks offer is an option mortgage, which is when the borrower can pay exactly what he wants to on his mortgage. This convenience can be dangerous if it is not managed correctly. There is normally a minimum amount due which is the amount of the interest due, and then the borrower pays anything (or nothing) above that. However, only paying the minimum means that the principal balance is never paid.

Those homeowners who have unstable income patterns, for instance a contractor, may choose to keep payments low until a big project is finished and then catch up. This will only work for those individuals who have enough discipline to pay the larger amount when the funds are available.

Banks have been cutting their home loan portfolios back, that is certain, but the careful borrower can still find a mortgage.

Smaller, community focused banks are still extremely active in the home loan business. This is not surprising. The origin of the mortgage business was small, regionally focused “building societies”, who took in deposits from local depositors to lend out to local homebuyers. These banks may no longer be called by the same name, but they are performing the same task, staying local, and this has protected them from many problems.

They are still issuing mortgages in an around their local area, the community they know, and in many areas are filling the gap left open by the big lenders who are now gone.

Big commercial banks have cut back dramatically in mortgage lending, but the small community banks are continuing their mission, even if their growth has slowed.

These financial institutions, which include development banks and credit unions and may even be non-profit entities, have been very successful lending to poor risk borrowers because they stay involved with the customer. These banks are not just getting by, they are succeeding.

Take, for example, Shorebank, a small community bank serving that city’s poorer community; its delinquency rate is 3.1%, compared to the national average of 18.7%. Since they are working with sub prime customers, their rates are higher, and they are extremely careful about how they manage their loans. They strive to be profitable, but not to be involved in “profit maximizing” according to Mark Pinsky, CEO of Opportunity Finance Network, an umbrella group for community development finance institutions. Reading between the lines, profit maximizing can be understood to represent the greed that has been one of the foundations of the financial markets’ current woes.

A case in point: Angelo Mozilo, the CEO of beleaguered Countrywide Financial, had a salary in 2007 of $22.1million, while Douglas Bystry, CEO of Clearinghouse CDFI received a salary of $190,000. ShoreBank has its location in an abandoned 1920’s movie house, not a multilevel steel and granite behemoth in a suburban corporate park.

This breed of sub prime lenders are committed to the locale and so to the loans they make, and instead of merely originating the loans and reselling as most big lenders do, they use initiatives that help insure the loans will be paid. Take the program run by Shorebank that educates its customers in energy conservation to save costs, money saved that can contribute to paying the mortgage.

The mortgage world has been sent completely on its ear this year, with bailouts, credit problems, foreclosures and more. What’s in store for us now? Is there any way to know if the rates will continue to go down?

Tight conditions in the lending world should normally mean lower rates, since lenders would have to lower rates in order to attract customers with good credit ratings. However, lenders are doing the opposite, and raising rates in an attempt to increase revenue.

Under normal circumstances, this would seem like a bad choice since the usual route to increased earnings is to lower prices. But it seems that in today’s crazy financial world, the old choices do not apply and banks are getting their cue from credit card companies to raise instead of lower rates.

In the good old days, a slowdown in the markets would usually mean a decrease in interest rates since banks would try to attract more customers with attractive rates. Matters are not like they were before, though, and new rules seem to be the rule.

What does all of this portend for someone who needs to decide if this is the best time to borrow for a home? Wait for this time to pass and for rates to come down or grab a loan now, while there is still some credit available, or wait for the fallout from the recession?

Some economists are not only forecasting a recession, but even a depression, with deflation instead of inflation. Deflation would mean even lower interest rates so anyone who is thinking about a purchase or refinancing at this stage would probably be better off to wait for conditions to improve in the world of interest rates.

Some lenders are still actively seeking borrowers. There are quite a few small banks that never got caught up in the credit problems like the larger banks. Some were just too small to venture into dangerous loans.

A second supporting argument for waiting is that housing prices continue to plummet, with predictions of futher price cuts of as much as 35%, even after the 20 to 25% decreases already seen. Case-Schiller, a research organization that conducts such studies, indicates that in some regions prices have plummeted 25%, with national averages at 17%. If a combination of lower interest rates and lower home prices are in store for the housing market, it may be wise to delay a home buying decision.