Let’s assume that a lender originates a fixed 30 year mortgage loan at 4% today.
If inflation is kept at 2% like the FED ideally would like (let’s assume the world is perfect and this rate can be kept locked for the full 30 years), that means that the 4% rate on the mortgage and thus the yearly total payments the lender is receiving, is losing 2% of its value every year. If we take a look at year 30, (let’s assume the borrower never refinances or sells the property) the lenders effective rate has fallen to 2.18% for the final year.
Why do lenders originate fixed rate mortgages if the fixed rate will begin to lose value almost immediately upon origination and ultimately the desired yield is significantly lower towards the end of the loans life?
Do they instead price the rate higher, let’s say 6%, so that after 30 years of inflationary loss the yield is actually 4%?
Was wondering this, thanks in advance for the input!
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