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Inflation's Effects on Your Mortgage

Inflation is one of those unforeseeable circumstances that can affect a person’s life in numerous ways- usually in a negative manner. Inflation cannot really be controlled by anyone, and is often out of the hands of most people. All a person can do is react to inflation, and do their best to avoid the major and most dire consequences involved with it.

There is a simple, basic truth involved with inflation: prices rise, and usually wages rise with them (albeit eventually). Usually, as prices rise, the perception is the amount being paid in interest rates involved with mortgage are also going up. But, in some ways, a person is actually paying less in interest (although the dollar amount may seem higher) because interest rates are flat and staid- due to a mortgage contract- and interest rates rarely come in line with inflation per dollar amounts. The higher the inflation rate for mortgage payments, the lower the actual worth in dollar amounts being paid.

In other words, the dollar amount of interest may seem higher during inflation periods, but in reality a person may be paying less in terms of inflation dollars. Essentially, since the interest rate in dollar amounts stays the same, the interest rate will not account for inflation, and thus a person will actually be paying less. The same goes for deflation, in which the dollar amount a person is paying in mortgage will actually be higher than usual because the mortgage interest rates do not account for deflation rates.

But, on the negative side of things, inflation typically leads to less buying power for the consumer. Inflation in general means people must pay more for goods and services than they had to in the past, but this of course does not factor into contractual things like mortgage, interest rates and other things. But, these contractual factors may have fine print, which may include stipulations that account for interest rate rises in accordance with monetary inflation.

The important thing to remember is that inflation does not affect everything in the same manner. During the 2008 recession, which saw inflation skyrocket, gas prices more than doubled in price while home prices plummeted to record-low numbers. Homes experienced a deflation in value, while gas prices experienced an inflation. In an attempt to avoid rising inflation during the recession of 2008, the federal government passed an economic stimulus plan to avoid drastic inflation. But, investors were none the less worried about inflation, and thus started investing in gold. This mass investment caused an inflation in the gold market. But, all the while personal income was hit with a devastating deflation in value.

Inflation also causes people to stop saving, which has a chain reaction that goes to banks and eventually to home mortgages in the process. In the end, inflation can harm home mortgage rates in the long run. But, in the short run, inflation leads to a homeowner actually paying less in cash value for interest than they were before the inflation period began.

April Santos writes for www.lifeinsurancequotes.info, a website that understands the stress of home-buying should not translate to finding the right life insurance.

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