As you might know if you’ve been following my blog, I’m not exactly a huge fan of debt. The idea of borrowing money in order to buy something gives me cold shivers – and not the good kind (if there are any!).
Okay, I do realize that there are some instances when we might need to borrow, and people do face difficult situations at times that make it practical to take on short or long-term debt. With respect to the former, we do need to have shelter. So while it’s quite normal to rent, buying a place can also make sense when done for the right reasons and for the right price.
Of course I mention price, right? It matters, and this is where a lot of people take on debt – buying a place they like but can’t afford. Mortgages are a part of the landscape here in America, and with homes generally being appreciating assets (or at least not depreciating like many other purchases), taking on a reasonable one is not necessarily “bad” debt.
But what about a situation where a person can pay cash for a house, but takes out a mortgage anyway?
My line of thinking is that it depends on the person’s overall situation. However, if the person’s net worth is high enough and cash flow is steady and significant enough, paying cash could be a fantastic opportunity to avoid taking on debt. After all, a mortgage payment isn’t rent – it’s the result of a loan. Don’t we preach avoiding debt, here in the personal finance blogosphere?
Well, somebody I know was talking about a home purchase where he took out a mortgage that was probably a good deal higher than the typical American mortgage. But the thing is, it could have been avoided entirely and cash paid in full instead.
However, the thinking was that he could take out a very low-interest loan, and then look at it as a way to borrow money to invest. In other words, he felt that the spread between his investment returns and his interest charges would end up being profit for him.
In simple terms, if he pays 3% interest but can earn 10% through investments, there could be money made
A mortgage loan as a way to borrow money to invest? Apparently so, to that guy.
Personally, I’m not a fan of this. While it could be possible to make money this way, I think there are some risks as well. In particular, what if the market goes down during that time? There are no guarantees that the market will go up that much, as we’ve seen when looking at stocks and inflation.
Besides, wouldn’t the “sleep well at night” factor be higher with no debt instead?
So what do you think? Agree with me, or the “investor”?