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I've been looking at a lot of loan amortization schedules for mortgages lately and wonder how they relate to real dollars over time with inflation.

The calculators I've been using have a calculated value for total interest paid over the life of the loan. Wouldn't that be calculated in today's dollars instead of real dollars taking inflation into account? I would imagine that the dollar would be worth much less at the end of a 30 year loan than at the beginning.

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I would imagine that the dollar would be worth much less at the end of a 30 year loan than at the beginning

Exactly right. That's why the current rates are so attractive - you're basically getting the money for free. The 3-4% rate for the loan is similar to the inflation rate. The amortization schedule of a fixed-rate loan doesn't take inflation into account because its a fixed rate loan.

If you want to estimate how much your nominal dollars would be worth in today's real dollars - you can just use the inflation estimate (say 4% a year?), and then its simple math.

  • I am not sure I would call present value calculations simple math :), but I like your answer. – Pablitorun Mar 23 '12 at 13:08
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Yes, inflation happens in the background, and you pay back with cheaper dollars over time. In the same way you want your investments to exceed inflation by a decent amount, and just matching inflation is still a losing proposition as tax is paid on the gains (in taxable accounts, obviously), your mortgage works in your favor.

In my case, my 3.5% mortgage costs 2.5% after tax. I view this as free money as I am paying the bank less than the expected rate of inflation over the life of the loan.

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