tag:blogger.com,1999:blog-5465015914589377788.post6514375583604253961..comments2024-02-17T11:07:06.232-05:00Comments on Michael James on Money: Inflation’s Effect on MortgagesMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5465015914589377788.post-83228867692269930122012-08-29T22:05:46.069-04:002012-08-29T22:05:46.069-04:00Now before we start wishing for higher inflation, ...Now before we start wishing for higher inflation, we need incomes to keep pace with those kind of numbers to make the scenario work.Chris Bnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-74229880692648829642012-08-29T17:18:05.756-04:002012-08-29T17:18:05.756-04:00@Returns Reaper and @MMorgan: Because 2 people as...@Returns Reaper and @MMorgan: Because 2 people asked about the total real value of the payments in each scenario, I sparked up my spreadsheet again. <br /><br />Total payments in real terms:<br />Scenario 1: $310,906<br />Scenario 2: $302,876<br /><br />As I suspected, the total real payments is lower in the higher inflation case because the initial payment is higher so that the real balance owing is lower over the life of the mortgage. This is another way of seeing that the risk of default later in the mortgage life is lower in the higher inflation case.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-25583842800879664992012-08-29T17:06:32.936-04:002012-08-29T17:06:32.936-04:00The real value of the last payment is interesting ...The real value of the last payment is interesting - do you have a sense of what the real value of the total payments would be as between the two scenarios (i.e. how much is paid in real dollars in each scenario when you include interest payments and does that affect the risk)?MMorganhttps://www.blogger.com/profile/05485995543755228198noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-5209439376776937612012-08-29T15:04:19.529-04:002012-08-29T15:04:19.529-04:00@MMorgan: In a scenario where inflation rises, th...@MMorgan: In a scenario where inflation rises, the benefit you get is limited to your mortgage term, as you say. However, the scenarios I describe are intended to show the difference in two scenarios even when inflation stays constant throughout the life of the mortgage in each scenario.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-78714337695846276012012-08-29T14:41:55.150-04:002012-08-29T14:41:55.150-04:00I think the more relevant point is that the benefi...I think the more relevant point is that the beneficial effect of inflation is reduced when your mortgage term is significantly shorter than the amortization period. For example, if the inflation rate rises significantly then it is true that your mortgage debt erodes more quickly because you are paying with less valuable currency. However, the next time you have to renew your mortgage, the rate will go up to reflect the increase in inflation and therefore the erosion will be offset by that higher rate. I don't think your simulation takes this into account because it seems to assume a constant interest rate over the entire 25 year period. Your similation would be entirely accurate for debt-phobes who have a five year mortgage and who pay it off during the intial term. :)MMorganhttps://www.blogger.com/profile/05485995543755228198noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-3619737979009277212012-08-29T10:16:30.808-04:002012-08-29T10:16:30.808-04:00@Returns Reaper: My guess is that scenario 2 (hig...@Returns Reaper: My guess is that scenario 2 (higher inflation and interest rate) would lead to lower overall real dollars paid because larger payments come up front.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-68037030012647953282012-08-29T09:57:12.705-04:002012-08-29T09:57:12.705-04:00In both of your examples, the mortgage rate was 2%...In both of your examples, the mortgage rate was 2% over the rate of inflation. I wonder which one pays more in real dollars over the life of the mortgage? My intuition says they'd be pretty close, but I haven't done the math yet.Returns Reapernoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-52586898681895322522012-08-29T09:37:07.009-04:002012-08-29T09:37:07.009-04:00@MMorgan: That's a significant factor. So, w...@MMorgan: That's a significant factor. So, with inflation and interest rates low, the probability of rates rising is higher than it was in the 1980s and simultaneously, today's mortgage debts erode due to inflation slower.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-1119049520126893172012-08-29T08:57:05.115-04:002012-08-29T08:57:05.115-04:00The other significant factor is that you don't...The other significant factor is that you don't necessarily have your initial mortgage rate over the entire amortization period. Typically, you'll have a rate for 1 to 5 years. If interest rates rise then the mortgagor will be renegotiating to a higher rate which he or she may or may not be able to affort. Essentially it's the same problem as with ARM mortgages except the higher rates are imposed by the prevailing economy as opposed to a contractual agreement.MMorganhttps://www.blogger.com/profile/05485995543755228198noreply@blogger.com