Why is it better to buy a home with a mortgage even if you can buy it off in full?
In: Economics
It isn’t always necessarily true.
But it just has to do with the mortgage interest rate vs the possible rate of return you could make on investing your money.
Like say you go to buy a house, and you have the option for taking a $100,000 mortgage and investing your money, or just paying for the house in full.
If you decide to pay for the house in full, great, you won’t have to pay any interest anywhere so you are “saving” that potential extra money spent.
But let’s say you take out the 100k mortgage at a 7% interest rate. And invest your 100k cash. At the end of the year you will now have a total mortgage of 107k because of the 7% interest accrued.
But, if your investments went up by 8%, then your investment account now has 108k in it. Meaning even though you are paying interest, you still made $1,000 by just investing your money.
This becomes doubly true when interest rates are low, like 5% or lower, because that’s easier for investments to beat.
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