Mortgages & Inflation: After some research I'm pulling a 180 on my gameplan. (rates, deposit)
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I think the reason we are getting into this argument is that we are not using clearly defined terms. If everything would be put in terms of purchasing power, real dollars, nominal dollars, real change, nominal change, etc. we'd avoid a lot of time-wasting, IMO. Also, "hedge" needs to be precisely defined. "Risk" must be stated in terms of the probability of something happening - what?
I will repeat what I said earlier, and that is that nominal and real dollars are both valid units of currency, just as feet and meters are both valid units of length. But we need to be clear with our terminology, and "hedge" and "risk" should be defined precisely, in such a way it is clear whether real or nominal dollars are relevant.
I never expected Lowexpectations and Mathjak to get into this sort of argument.
Fixed interest rate of mortgage doesn't need to move to be a hedge. Just like insurance you are paying a premium to hedge against the risk of future high interest rate hikes. Any kind of insurance can be thought as a hedge to protect investment.
Anything that doesn't move is not a hedge. Except, of course, the actual, physical, literal hedge at your house.
Insurance is a hedge because it moves in the opposite direction of the protected assets. When your protected assets go down, insurance pays out to make up for the loss. Try something else.
Fixed interest rate of mortgage doesn't need to move to be a hedge. Just like insurance you are paying a premium to hedge against the risk of future high interest rate hikes. Any kind of insurance can be thought as a hedge to protect investment.
but it isn't insurance because insurance will replace what is lost.
a mortgage will replace nothing . it is what it purchases that acts as insurance. you can just buy what ever it is with your own money and have the same inflation hedge.
Anything that doesn't move is not a hedge. Except, of course, the actual, physical, literal hedge at your house.
Insurance is a hedge because it moves in the opposite direction of the protected assets. When your protected assets go down, insurance pays out to make up for the loss. Try something else.
yes , i agree with this . in the insurance example think about if you never had a mechanism to adjust the house value by the rate of inflation. you would get paid 30 years from now if the house burns down in today's dollars.
that would do you little good even with inflation. you would need some thing in the loop to grow that money. without it there is no insurance that would be worth a darn .
So while a mortgage insures your rate from going up it falls short of having a mechinism to adjust your income to inflation to pay it with. That is left to what you do for an inflation hedge the same as your policy would need an inflation rider.
Last edited by mathjak107; 05-09-2015 at 01:52 PM..
My question is does this general strategy seem like the best option? Doesn't taking out a large loan put you in the best financial position to hedge against this obviously inevetible inflation? If not, where would you invest your extra cash instead?
Depends. If you are going to be buying a home regardless, 100% you'd be a fool to pay cash rather than get a mortgage in the current environment. 20% not to pay PMI then leverage up.
If you aren't at a stable place in your life, renting and the ability to move as your life situation changes adds a tremendous amount of value. BUT you can still get exposure to leverage through careful equity selection (you can't just buy companies with a lot of debt -- it needs to be long-duration and not tied to LIBOR or temporary access to other peoples' money through business operations rather than explicit loans).
Sure, but what moves in value in real terms may not do so in nominal terms, and vice versa. The problem with this discussion is that "hedge" means different things depending on your formulation.
Depends. If you are going to be buying a home regardless, 100% you'd be a fool to pay cash rather than get a mortgage in the current environment. 20% not to pay PMI then leverage up.
yep . since most folks have neither the interest , the knowledge or the pucker factor for investing they are better off paying off the house. we get blinded because we like to invest but most of america as a group sucks at it and the work by ibbotson and morningstar proves it.
yep . since most folks have neither the interest , the knowledge or the pucker factor for investing they are better off paying off the house. we get blinded because we like to invest but most of america as a group sucks at it and the work by ibbotson and morningstar proves it.
Good points. I'm kind of assuming a certain degree of risk tolerance and either pre-existing knowledge or the intellectual curiosity to independently acquire it, which really isn't a safe assumption -- paying down the mortgage sure as heck beats holding cash or bonds, and probably at the end of the day is competitive with or better than a high-fee fund even in the current low-rate, easy-money environment.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.