The consumer price index fell for the third straight month as the price of gasoline continued its sharp decline. The prices on expenditures made by urban consumers decreased 0.1% over the past twelve months before seasonal adjustments. According to the latest release from the Bureau of Labor Statistics (BLS) the consumer price index decreased 0.7% on a seasonally adjusted month-over-month basis.

The energy price index fell 9.7% in January for seventh straight month-over-month decline. This was the largest month-over-month drop during that period. The driving force behind falling consumer prices and the energy index is the sharp drop in gasoline prices. The gasoline index, a component of the energy price index, fell 18.7% for the month and is down 35.4% for the year. The index for natural gas also fell for the month; dropping 3.4% on a seasonally adjusted month-over-month basis.

The food index was unchanged in January on a seasonally adjusted month-over-month basis. Over the past twelve months, however, the food index increased 3.2% before seasonal adjustments. The food at home index increased 3.3% over the last twelve month with a large increase in the meats, poultry, fish, and eggs group of 8.7% for the year.

Core CPI, which excludes the more volatile food and energy prices, increased 0.2% on a seasonally adjusted month-over-month basis. Over the past twelve months core CPI increased 1.6% before seasonal adjustments.

The shelter index rose 0.3% month-over-month in January after increasing 0.2% month-over-month in December. Over the past twelve months, the shelter index increased 2.9% before seasonal adjustments.

The increase in the shelter index partly reflects increases in rental prices; the BLS measure does not isolate the change in rental prices from the changes in the overall price index. NAHB constructs a real price index by deflating the price index for rent by the index for overall inflation. This measure indicates whether inflation in rents is faster or slower than general inflation and provides insight into the supply and demand conditions for rental housing, after controlling for overall inflation. When rents are rising faster (slower) than general inflation the real rent index rises (declines).

The growth in real rental prices continues to outpace growth in the CPI. The NAHB constructed real rent index increased 0.1% in January month-over-month. Real rental prices rose by 1.7% from one year ago.

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http://eyeonhousing.org/2015/02/consumers-prices-fall-0-7-in-january/

Rate shoppers naturally gravitate toward the lowest quotes, but a lower rate can lead to financial trouble if you don’t understand your loan terms. It’s important to know the relationship between rates and fixed terms so you can determine when it’s appropriate to use a shorter loan term instead of a longer one.

A 30-year fixed mortgage rate is higher than a five-year adjustable rate mortgage (ARM) rate because a financial institution is taking more risk to lend you the money for a longer period of time.

The reason for this goes to the root concept of how banks operate. A bank’s business model is to ensure that interest they collect on loans exceeds interest they must pay out on deposits.

Interest that banks must pay you on deposits rises as the economy expands, and falls as the economy contracts over time. It’s easier for banks to manage this interest rate risk in the short term.

For example, interest rates paid on checking and savings deposits are very low because you’re free to withdraw your money any time, while rates paid on certificate of deposit (CD) accounts are slightly higher because the bank requires you to keep those funds deposited for periods of one month to five years.

Because banks know  their expenses on deposits for periods up to five years, they know how to price mortgage loans up to five years. Today, many banks would pay you about 2.25 percent on a five-year CD, and they’d charge you about 3.25 percent for a five-year ARM.

But if you were getting a 30-year fixed loan, they might charge you about 3.875 percent — although these rates fluctuate. This rate is higher in order to compensate a bank for the interest rate risk they’re taking. Rates they must pay on deposits might be much higher during that 30-year period as the economy fluctuates, but your 3.875-percent mortgage rate is guaranteed.

Peg loan term to expected time in the loan

Let’s say you were buying a $300,000 home with 20 percent down, and chose the five-year term at 3.25 percent because the $1,044 payment sounded more affordable than the $1,129 payment on the 30-year fixed at 3.875 percent.

You must be aware that your rate is set for five years, then will adjust each year for 25 years. These adjustments protect the bank from interest rate risk by allowing the loan to move to a market rate when the five-year fixed period expires.

The initial fixed rate of 3.25 percent will change to a market rate comprised of a fluctuating index such as the one-year LIBOR rate (a benchmark for short-term interest rates worldwide) plus a base rate (called a margin) of about 2.25 percent. If the loan adjusted today, it would go down to 2.94 percent because LIBOR remains abnormally low — it was recently .69 percent — as the global economy struggles.

A more normal LIBOR rate is about 3.25 percent. Add that to the ARM margin of 2.25 percent, and your adjusted rate would be more like 6.5 percent, making your new payment in year six jump to $1,447 (which is calculated by amortizing the remaining balance at the five-year mark over the remaining 25 years of the loan).

This is $403 more than the payment on the initial five-year fixed period, and $318 more than the 30-year fixed you could’ve taken. And the loan will adjust to current LIBOR plus 2.25-percent margin once per year from that point forward.

It’s a lot of risk, and raises the question: How do you choose the right balance between the lowest rate and longest fixed term?

The answer is simple: Make sure your rate is fixed for as long as you expect to be in the home or in the loan.

If you know you’ll sell the home or pay off the loan in five years, a five-year ARM is appropriate. Other ARMs you can get have initial fixed periods of three, seven and 10 years, and rates rise as the terms lengthen. If you know you’ll be in the home or the loan longer than 10 years, then your safest budget move is to choose a 15-year fixed or 30-year fixed loan.

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http://www.zillow.com/blog/adjustable-rate-mortgage-timing-170590