Inflation on a 30 Year Mortgage

I recently received the following question:

In 1970 I purchased a nice house in the suburbs of Albany, New York for $54,500. Although the price of the home today is well above the inflation rate, I was wondering how the inflated dollars I’m spending on the last few payments has changed over the past 30 years. The mortgage payment has been consistent but I’m paying in inflated dollars, I just don’t know how much the value of each dollar has declined in purchasing power.   How would I calculate that figure?- John

Dear John,

Great Question! As you see, the benefit of inflation is that you get to pay back mortgages with inflated dollars. Although on most purchases, it works the other way around, you earn the money and then as you spend it, it buys less and less.  In a mortgage you are spending first and earning second. Although it seems like a benefit, one of the problems with inflation is that it encourages debt and we can see what that has done to our country.

But to answer your specific question we can look at our Inflation Calculator.  If we enter in January 1970 as the starting date and September 2010 as the ending date the inflation calculator says that we have had 477.88% inflation.  If we use the “How much would it cost calculator” just below the inflation calculator, we can put $54,500 into the starting amount and 477.9% in the rate of inflation box and when we press calculate we find that your  house would have to sell for $314,955.50 in order to have kept up with inflation.

But when you say you “Bought the house for $54,500” you really didn’t because as you say each payment was made with gradually declining valued dollars. You didn’t say how much your monthly payment was so I have made some assumptions. Assuming you put 10% down that would have been $5450 which according to the how much would it cost calculator, would be the equivalent of $31,495.55 today.

So assuming you put $5450 down you would have borrowed $49,050 and once again I am assuming you borrowed at 5% on a 30 year mortgage your monthly payment would be approximately $263.31. It gets really tricky to figure out how much you actually paid in current dollars because every payment has a different inflation adjustment. And you paid a bunch of interest over the years so you aren’t just paying the $54,500. On a $49,050 mortgage at 5% over 30 years you will have paid $45,742 in interest in addition to the $49,050 in principal.

But by using only the “How much would it cost calculator” we can figure out approximately how much your most recent payment is worth in 1970 dollars. With the rate of inflation still saying 477.9 we have to do a bit of trial and error (because it doesn’t allow you to calculate backwards) so you want to get the answer as close to $263.31 and so after a few tries I got a starting amount of $45. Which results in an after inflation amount of $260.06 and a starting amount of $46 results in $265.83 so that means that your current mortgage is actually only costing you a little over $45 in 1970 dollars.

The question then arises how does your income compare to your income in 1970?  Which opens another whole can of worms if you want to adjust for increased experience and not just for inflation.

Timothy McMahon, Editor

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