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Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar

Updated on May 26, 2009

When some people take a first look at their amortization schedule and realize that they have to pay back hundreds of thousands of dollars more than they are borrowing, they might feel a little faint. However, when you consider that a dollar never has the same value as time elapses you might feel like recovering a bit.

Let's assume that your father took out a mortgage in 1977. A 30 year term, normal mortgage in every way. If the last payment was due today, it would be due in 2007 dollars. Due to inflation, what you could buy for $100 in 1997 would cost you $371.56 today. Therefore, you are paying back in severely devalued currency what your father borrowed 30 years ago.

However, the devaluation of the dollar due to inflation is not the only factor to consider. Chances are that the three bedroom bungalow your father bought in 1977 cost him $20,000 (depending on market and location). Today that same house would be worth upwards of $300,000. So there is another sliding scale to consider. The upwards climb of the value of the house.

If the house price were fixed to that of inflation, that $20,000 bungalow would sell for $74,312. You know that there are precious few three bed bungalows anywhere south of the wilds of Montana that will sell for that price. Therefore, when you take all those factors of not only inflation but escalating house prices into consideration, the mortgage your father took out was a pretty good deal.

On the fixed rate of 7%, his first payment as his last was $133.06. That might have been a full week's wages back in 1977 but it's considerably less than that today. You could easily go have a nice dinner for two and spend at least that much.

Can we be assured that the next thirty years will bring an equal inflation? No one knows. However, August of 1955 was the last month when deflation occurred in the United States. And even then, it wasn't too huge of a hit, only -0.37% calculated annually. Every single month since then, inflation has gone up and the value of the dollar has gone down. Indeed. in March 1980 inflation jumped forward at a rate of 14.76% which may have been bad news for the economy but great news for mortgage holders of fixed rate loans!

There has been much discussion among economics experts as to whether the United States is in for a bout of deflation due to the current financial and market woes. As of the time of writing, that deflationary spiral has not yet surfaced and it may not happen at all. Even if we are to be subjected to deflation, history teaches us that in most cases deflation is a short term process and the odds are against it lasting for the full 30 year term of a mortgage.

Therefore, don't fear too much when you gaze upon those huge numbers that you're have to pay back in the distant future. Chances are that those sums won't be as astronomical by the time you get around to paying them, especially if your earnings keep track with inflation at a time when a loaf of bread costs $10 and a gallon of gas $40!

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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