Q: I must take issue with a recent column where you add together all the mortgage payments over 25 years and hence imply that each payment has the same value.
It's like adding lemons and oranges. A dollar today has a different value from one in 25 years.
Let's say you have a mortgage of just under $130,000, with an interest and principal payment that is $1000 a mon
Monday, September 6th 2004, 9:09AM
by The Landlord
th for 25 years and the interest rate is 8pc.
The last payment in 300 months' time will cost you $136.24 in today's money. You've spent 300,000 citrus dollars but, in today's money, your mortgage cost its original amount, less than $130,000, to pay off.
Now let's say that you could afford to pay $1100 a month instead. Your mortgage would be paid off in 232 months and you will have paid about 255,000 citrus dollars but, in today's money, it still cost the same $130,000.
The impact on your "wealth" is determined by what you would otherwise do with the extra $100 a month.
A: This is all getting a bit marmaladey. But you make an excellent point.
In other contexts, I've written about the time value of money and I should also do it when talking about the total cost of a mortgage.
Let's assume we've always got several thousand dollars of spare cash, so availability is not an issue.
If we have the choice of paying $1000 now or in a year, we should always choose to pay in a year. Ten years would be better still.
