The Grocery Store Analogy That Changes How People Think About Fixed Rate Mortgages

If you could lock in today's grocery prices for the next thirty years would you take that deal? Almost everyone would. Prices only move in one direction over time and locking in today's cost before inflation erodes purchasing power is exactly the kind of advantage most people would jump at if it were offered to them.

That is essentially what a thirty-year fixed rate mortgage does and Matthew Collett wants buyers to understand this benefit because it rarely comes up in the rate conversation even though it is one of the most compelling reasons to own rather than rent.

How the Inflation Advantage Actually Works

Your principal and interest payment on a thirty-year fixed mortgage stays exactly the same from month one through month three hundred and sixty. The dollar amount does not change. What does change is the real purchasing power of that dollar amount as inflation works on the broader economy over time.

Say your principal and interest payment is three thousand two hundred and fifty dollars today. Five years from now with even modest inflation that same three thousand two hundred and fifty dollars represents less real purchasing power than it did when you first made the payment. In today's dollars it might feel closer to three thousand dollars worth of spending weight rather than three thousand two hundred and fifty.

The payment did not shrink. What shrank is how heavy that payment feels relative to your income and the overall cost of everything else in your life which has continued to rise around it.

What This Means Compared to Renting

Rent does not lock in. Landlords adjust rent at renewal to reflect current market conditions and inflation in the rental market has been significant in most areas over recent years. The renter who was paying two thousand dollars a month five years ago is paying meaningfully more today with no end date in sight.

The homeowner who locked in a fixed principal and interest payment five years ago is paying exactly the same amount. The fixed payment that felt substantial at the time of purchase gradually becomes a smaller and smaller proportion of household income as income grows and inflation moves everything else higher.

An Often Overlooked Reason to Buy Now

In a market where rates are elevated and monthly payments feel large this perspective is worth considering. Today's payment at today's rate on today's home has the inflation hedge built in from day one. The longer it is held the lighter that fixed obligation becomes relative to everything else.

If you would like Matthew Collett to walk through how this might look for your specific situation and purchase price reach out and he will go through it together with you.

Sources

FannieMae.com
ConsumerFinancialProtectionBureau.gov
MortgageNewsDaily.com
FederalReserve.gov
Investopedia.com