Select a term from the dropdown text box. The online mortgage
dictionary will display a definition, plus links to other
related web pages.
Inflation
Inflation refers to an increase, over time, in the general price of
all goods and services. The effect of inflation is a reduction,
over time, in the purchasing power of money. Over the past 50 years,
the average annual rate of inflation has been about 3%.
Because of inflation, we would expect a dollar spent today to be
more valuable than a dollar spent some time in the future;
that is, we should be able to buy more goods and services
with a dollar today than with a dollar in the future.
It makes sense to account for inflation when we compare the cost of
different mortgages. For example, suppose two mortgages have the
same interest expense; but one mortgage is a 30-year mortgage and the
other is a 25-year mortgage. The 30-year mortgage is the better
value, since it is paid for in the more distant future with
"less valuable" dollars.