A 30-year fixed rate mortgage is protection money

Thirty-year mortgages rates haven’t been this cheap in my lifetime.  Considering this was the year of my 20th high school reunion, that’s a fairly long time.

A fixed-rate mortgage costs more to obtain than an adjustable-rate mortgage of the same term because the lender bears the interest-rate risk.  The means that the lender agrees to charge you a constant interest rate for up to the entire term of the mortgage, regardless of how interest rates fluctuate during those times.  If interest rates are going at 15% or more in the 2020’s, too bad!

But there’s another trend that makes fixed-rate mortgages even more appealing:  Inflation. Here’s how that works.

If I had gotten a 30-year, $100,000 fixed-rate mortgage in 1990 (when interest rates were about 10%), my monthly payment would have been $878.  If I had held that mortgage through today, my monthly payment would be exactly the same in dollars:  $878.

Let’s plug this amount in an inflation calculator.  (Here’s the one I used.)  My $878 in 1990 would buy $1,423 worth of stuff in 2009!  Or, looking at it another way, my $878 mortgage payment would only “feel like” $512 in 2009.  The fixed-rate mortgage payment becomes less of a burden as time goes on because of inflation.  Inflation is a trend that is unlikely to stop.

As everything else is getting more expensive year by year, a fixed-rate mortgage payment stays the same.  It’s inflation protection.

Is this a good reason in itself to run out and get a mortgage if you don’t need one?  Of course not!  But if you’re in the latter half of your mortgage, ask yourself if the payment is easier to make than it was 15 years ago.  It probably is.  If you haven’t refinanced in a while, this may be a great time to do so.  Just refinance your mortgage to another fixed-rate mortgage with your current balance, and enjoy a drop in payment, or a drop in payoff time, or even both.

And watch that payment become easier and easier to make each year.

(Thanks to Ultimate Money Blog for including this post in the Carnival of Personal Finance!)

John Wedding

Husband. Father. Web publisher. Musician. John has blogged at Mighty Bargain Hunter since 2005, helping people to recognize the good deals in life.

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Comments

  1. We’re actually considering “trading up” if you will, into a larger house. It’s not that the low rates drove this decision since we were planning on moving already, but now that we’ve reached the point of assessing a move, we can actually afford something larger and nicer. These low rates are pretty amazing! I do realize once rates rise, it may impact affordability and kill home price increases again, but we don’t plan on flipping. For us, it might make the difference between having a “decent” home vs. our dream home.

  2. its definitely the best time that we will probably see in our life times for low interest rates. while the rates are incredibly low, watch out for all the fees associated it a refinance, they can add up real quick and put a short term hin on your budget.
    Preferred Financial Services Blog

  3. Did exactly that in December. Decided to take an 80% mortgage fixed at 4.62% for 30 years instead of paying cash. But I still read lots of advice to pay down mortgages as fast as possible to avoid paying interest.

  4. Wasn’t inflation something like 0% this year? At least that’s the excuse I’ve been hearing at work about wage freezes…

  5. Very good point factoring inflation into the equation. Though it looks like a no-brainer, people forget inflation when thinking long term.

  6. I realize that this is an old post but it is right on the money. We were very lucky because we bought a home in 2002 before the craziness began with house prices. At that time our interest rate was almost 7%.

    In 2009, we were able to grab a foreclosure for almost $60,000 under appraised value. We financed it with an FHA mortgage at 5%. Then last year I refinanced at almost exactly the right time and locked in a 3.25% mortgage. I told my wife that we WILL NOT make extra payments on this house. I will be glad to watch inflation make our payment seem smaller and smaller over the years.

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