A fresh idea about your stale mortgage

What if you could pay 2009 prices in 2019?

You could buy a first-class stamp for 42 cents, a gallon of milk for $2.69, or a pound of your favorite bacon for $3.19. You could see the latest movie for $7.25 or buy a carton of Coke for $6.

Almost everyone has (or had) a mortgage, but mortgages are often portrayed as a sort of necessary evil … you need one to buy a house, but you should pay it off as fast as you can.

My take is different. You’ll need to understand monetary inflation to learn this lesson. You’ve seen inflation, we all have, but it’s unlikely you’ve given it much thought.

The price of milk or bacon goes up a few cents each year; that’s inflation. We grow used to these modest price changes. We expect prices to go up and we expect our pay to rise, too. Mostly, these small increments aren’t dramatic and we don’t fret much about them. Price increases are built into the economic system.

You’ve watched inflation all your life, but you’ve mainly seen it in reverse. Although rising prices are what we see, what is really happening is that the purchasing power of the United States dollar is falling slightly. Tomorrow’s dollar is worth less than today’s.

Look at it in this way: Would you rather have what a thousand dollars bought in 2009 or today?

Most times, these price increases (or decreases in the dollar’s value, depending on which way you look at it) are small. The U.S. Federal Reserve Board sets their inflation target at 2% each year, although some years are a bit higher and others a bit lower. A few times – the 1980s, for example – were a lot higher for a lot longer. But, for purposes of this explanation, that merely strengthens my point.

Back in 2009, I bought a house. The price was $180,000. Now the usual process of buying/borrowing requires a 20% down payment, so we’re going to talk about a $150,000 mortgage.

But I tricked the system. Instead of paying $150,000 with those valuable dollars then, I deferred part of the payments until today. I’m paying these with today’s dollars – worth some 18% less today than they were in 2009.

Think about this. Today’s entire payment was locked-in using those old dollars. Every payment I will make is with less valuable dollars. Take $150,000 and divide by 360. That makes average principal payments of $416.66 per month for 30 years … except those last monthly payments will be worth half as much (buying power) as earlier ones.

In other words, I tricked the system big time.

Wait, wait, wait, you say. That example doesn’t include interest. Right. Interest is a big part of mortgages payments. In fact, at todays’ rates, the actual monthly payment (principal and interest only) for the $150,000 mortgage would be $733.53. Interest alone adds $114,069.27 if I keep the house and make all 360 monthly payments. That’s a lot of money.

But, still … even those last interest payments will be made with much-diminished dollars. Anyone with longer-term mortgage payments will affirm that monthly payments that seemed high in past decades look ridiculously low compared to the new neighbor next door.

In other words, 30 years hence, my entire payment is being made with cheap dollars.

And – this is key – while payments are made with old dollars, the house’s market price continually adjusts to new dollars.

No one will care what I paid for the house in 2009. In 2039, the price will be determined by the value of other houses of that future era. If we assume the same 2% inflation rate, the old dollars will be worth half as much as when purchased (in old dollars) but the house will be worth almost twice (1.81) as much (in new dollars).

I will have paid $264,069.27 (plus the $30,000 down payment) for a house now worth $325,800. Of course, this assumes the value of that particular house appreciates at the same pace as inflation. If it’s in a good neighborhood or housing in general appreciates at a higher rate, I’ll have done even better. If housing values grow annually by 2.57% (the national average from 1989-2019), the house will be worth $385,374.

So, here’s my point. Don’t worry so much about paying off your mortgage. Don’t worry so much about the interest you’ll pay. Chances are good that interest costs will be offset by inflation, and then some.

Instead of worrying about the mortgage, focus on building emergency reserves and your 401(k) retirement account. If you still have extra money, start an investment account.

Let the mortgage and inflation work for you as the house price rises and you enjoy that “locked-in” payment from yesteryear.

Dan Danford is a Certified Finanacial Planning professional and member of the Financial Planning Association of Greater Kansas City. He learned early ideas about money from his late father Thad Danford who charged rent on the family lawn mower while Dan cut neighborhood lawns. Danford is a practicing investment adviser at Family Investment Center and author of “Stuck in the Middle: The Mistakes That Jeopardize Your Financial Success and How to Fix Them.”