Suppose That You Are Buying Your First Home

question 168

Essay

Suppose that you are buying your first home. Current interest rates on a 30-year fixed-rate mortgage are 5%. Lenders expect an inflation rate of 2% over the next 30 years, thus giving them an expected real return of 3%. If actual inflation over the next 30 years is 4% because of a continued rapid expansion of the money supply, would you be better off or worse off by taking out a 30-year fixed-rate mortgage?

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Definitions:

Financial Account

Part of the balance of payments, it records transactions that involve the exchange of international ownership of assets.

Balance Surplus

A situation in which income or receipts exceed expenditures or outlays, often referring to a country's trade or fiscal balance.

Balance Deficit

A situation in financial accounts, particularly in national accounts, where total outflows exceed total inflows.

Capital and Financial Account

A component of a nation's balance of payments that covers the transfer of capital and financial assets across international borders.