Why is it better to buy a home with a mortgage even if you can buy it off in full?
In: Economics
It was, because the interest rate was below the inflation rate.. so the money spent was going to pay more per year than the money owed.
Now interest rates are higher – much higher – this is not true any more.
Simply put a 3.8% 30 year mortage while investing an equal amount at 5.2% in a HYS or other crazily good investment means it’d be real dumb to not take the free money – because when the difference between your mortgage and the income gain rate on a hys or other investment is bigger… so if you owe 100k at 3.8% and you have 100k in cash you could pay that loan off at but your savings account or investment account is paying 5.8%, you’d be an idiot losing 2.6% per year on your money by paying it off instead of just enjoying the fact that your mortgage rate is so low that it is not only free money, it is +2% per year money.
Better to own than owe. Sure, in a good market you may be able to beat, but investing is not a sure thing and nothing goes straight up. In short, you could get handed your ass.
It’s called opportunity cost. It’s the cost of not making a better investment. You could take the money and make an investment that has a better return on investment than buying a house. That doesn’t necessarily mean that it’s always that way though. There are a number of things that could make it sway one way or another and some it is just dumb luck when it comes to housing.
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