A couple days ago I posted “Your Mortgage Is NOT an Inflation Hedge” where I laid out a scenario where a mortgage is not a good inflation hedge. I learned a lot from the comments and so this is an update where I have included a link to a spreadsheet calculator to find if your mortgage is a good hedge against inflation. What I have found is that the claim: “A 30 year mortgage is always better than a 15 year or paying in cash because of inflation” is not always true. The details of the down payment, mortgage interest rate, assumed inflation rate, and interest tax deductions MUST be taken into account to say for sure. Very often more is lost in the cost in interest paid over a 30 year mortgage than is gained through the inflation. Some things to remember:
-This is not a debate whether real estate appreciation out paces inflation. The argument in question is whether in inflation adjusted terms you pay less with a 30 year mortgage because you lock in a price at today’s dollars but are paying in inflation adjusted dollars. We are only talking about whether to pay in cash, with a 15 year, or a 30 year mortgage. Property appreciation occurs the same regardless of how a home is purchased so it is not a relevant variable here.
-Keep in mind that although inflation has been double digits at certain times like the 70s. When inputting numbers into the calculator you are putting in the annual average of what you assume the next 30 years of inflation will hold. When predicting the future its often wise to use the average of the past 100 years or so. So be careful not to cherry pick the highest numbers that make you see what you want to. Even if you cherry pick the three decades with the highest inflation in U.S history you would still have an average inflation less than 5%. Pretty high, but also the ideal scenario. Also keep in mind that there is a point where inflation rises high enough for long enough that it would ABSOLUTELY be a winning scenario for you to have a 30 year mortgage. I am not arguing against that.
-I added a mortgage interest tax write-off bit to the calculator. Keep in mind your circumstances and make sure to put realistic numbers. Whether you have a standard or itemized deductions or whether it is primary residents or an investment property etc.
-A huge factor not considered in this spreadsheet calculator is the opportunity cost of the money you use to pay for a house in cash or in bigger payments for a 15 year mortgage as apposed to the 30 year mortgage. For example instead of making higher monthly payments with a 15 year mortgage you get a 30 year and invest the difference into the stock market. In the future I would like to add to this feature to the spreadsheet calculator. However keep in mind that many people do not have the discipline or circumstances to get a 30 year mortgage and then religiously invest the difference of a 30 year and 15 year mortgage into the stock market for 30 years. So automatically making the assumption that will happen may be wrong.
-Yet another thing to keep in mind. The assumed advantage of a 30 year mortgage is that you lock in a price for the house today. But as inflation occurs and your income rises with inflation. You are then paying yesterdays price with today’s inflated dollars. One problem with the assumption is that on average people’s income has not risen with inflation as is assumed. Most people’s incomes do not go up 3.22% a year for 30 years.
-Last but not least. There’s not a terrible chance of errors in the calculator so I apologize in advance if there are.
Here is the link to the spreadsheet calculator: