Inflation vs. a 30-Year Fixed Rate Mortgage

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Did you know that a 30-year Fixed-Rate Mortgage can have a lot of benefits especially if you are looking to build your real estate portfolio?

Let us go over what a 30-year Fixed-Rate Mortgage looks like and compare that to the rent and appreciation of the value of a house. We will then adjust it for inflation over 30 years and see how this can be a good thing for us as homeowners.

In the scenario, we will put our focus on a house we can purchase for $250,000. We're going to borrow 80% of the aforementioned amount at a 3.5% interest rate. Usually, you get a lower rate if you are buying it as a primary residence.

However, if you are looking at an investment loan, the rate might be higher but it is possible to still take out a loan under your personal name at 3.5%. I'm not going to get too much into the weeds about expenses and stuff.

In the next 30 years, the monthly payment is going to be $898.00 from the first payment until our last payment on the mortgage. After confirming the market rent in the area, we rent it for $1500 per month.

Now, if we apply a 3% inflation annually, the rent is going to go from $1,500 to approximately $3600. With the growth in the monthly rent minus the fixed monthly mortgage payment, you are looking at a lucrative rent income.

This is all assuming that your expenses remain a fixed percentage of your gross and you get a continuous 3% inflation rate. This means a steady cash flow. This is why I love 30-year fixed loans especially during this time where the interest rate is lower. I'd say, "Lock it in, set it, and forget it." I would just amortize it and pay it off over thirty years unless you want to unlock the equity.

Now, let's take a look at the house value. We bought it at $250,000, and if we adjusted it for inflation, it's going to go from 250,000 slowly to 600,000 by the end of the loan. And, this is not factoring in additional appreciation over inflation.

This is just saying, "Hey, we're going to see inflation. It's going to happen, and this is what the numbers are going to look like." With that being said, we are using dollars that are 30 years in the future to pay off a loan that we originated 30 years ago, or 20 years ago, or 10 years ago. It's a big difference.

The loan itself is not going to be worth as much later on than it is now. Awesome, right?

Let's do a little exercise. Let's say you are in the 20th year of your loan, and you want to buy in the same neighborhood a house you can rent out. Now, this house is going to cost you $450,000.

We will need to put a 20% down payment, and borrow the 80% which is about $360,000. Your payment is going to be approximately $1,600. This is assuming the interest rates stay low at 3.5%. With the inflation rate, we are still able to earn a good amount of money in our rental income.

Let's say it goes up to 5% or even 7%, which is not unlikely because two years ago, I paid that on a commercial loan. Now, we apply the same process and see that the projected monthly payment and monthly income can still generate profit for us.

That's the power of getting a 30-year fixed-rate mortgage and just allowing inflation to work its magic. There are so many benefits to real estate and this one is often overlooked. I hope this was insightful.

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