Eli5<- what are the pros/cons of borrowing money from the bank vs paying cash when buying a house?

Question

And why would it ever be a good idea to borrow if you can pay cash and pay no interest to the bank?

In: 18

Answer 1

Depends on the interest rate, and your own time discount rate. Money now is worth more than money tomorrow. And every person has a preference for how much more money is worth now compared to tomorrow. E.g., some people will prefer 100 dollars now over 200 dollars a year from now. Some, would prefer to wait the year.

If the interest on the loan is lower than your own time discount rate, it is preferable to pay the money in the future instead of paying the full price today, because it is essentially less expensive according to your own preferences for the time value of money.

There’s also some real advantage depending again on inflation and the interest rate. If the interest rate is low compared to inflation over the time of the loan, it’s also cheaper to pay over time.