Question

We financed a house for 2n years and agreed to make a fixed payment at the end of each
month for the next 2n years. My spouse and I agreed to the following payment scheme: I would make
the monthly payments for the first year. They would make the monthly payments for the second
year. We would alternate each year thereafter. Was this a fair compromise? If not, who got the
better deal

Answer 1

At the hindsight, it may look like a fair arrangement on the part of both the spouses because of the even number of years and the equal number of installment payments that are needed to be paid by each spouse alternatively.

However, if we take into consideration the future and present values of the outflows, the picture will turn out ot be different.

For Eg: In 2n, lets assume n = 2 for simplicity sake, fixed payment amounts to $100 and Risk free Rate of interet is 5%.

If A makes the payment in the first year, it will be a loss for him as by the time B starts making the payment the next year of the exact same amount, the value of a $ will reduce purely because of future value play (increase in inflation will reduce the value of a $) but will continue to receive the similar benefits as A .

Similarly, the one who makes the payment at the last will benefit the most as the amount of installment will remain constant through out but he will esentially be paying less in terms value but will be receiving equivalent value as the other party.

For eg: $100 today can buy you 2 apples but sames $100 will buy you less than 2 apples next year because of increase in inflation (which is generally assumed)