Why does a man worth $53 billion get a loan to buy a home? It’s a good question, and one you might want to share with clients who dream of paying all-cash for a home. It may feel good to live mortgage-free, but there can be benefits in carrying some productive debt.
For those who are not ultra-wealthy, the mortgage advantage remains. The typical homeowner may not have the same investment opportunities as Bill Gates (net worth: $78 billion). But opportunity cost applies to anyone with debt, too.
As of this writing, the average credit card interest rate in the U.S. is over 15 percent. So why would you use your cash to buy a home or pre-pay your mortgage balance if you’ve got credit card or other expensive debt? Use your cheap mortgage to buy your house and pay off debt with your cash.
The same logic applies when determining how much to put down on your home purchase.
It might make more sense to go with an 80/10/10 mortgage, putting ten percent down payment and opening a line of credit for another ten percent, instead of coming up with 20% in cash.
Valerie McEvoy RE/MAX Preferred Properties