"What are your thoughts on this article? Particularly, what are your thoughts on comment #125 by csdx? I quote, "By having debt, you’re in effect getting something at today’s price while paying for it with your future dollars which are devalued due to inflation. Thus a mortgage can act as a hedge against high inflation."
Is paying cash for your house always the smartest way to go about it?"
1. Opportunity cost is a great argument for businesses to make, but a lousy one for individuals to use in their personal finances. Usually people trying to lend you money make this argument. Don't listen to them. Why?
2. Because comparing stock returns, which are very risky, with the guaranteed rate of return of not paying interest, is comparing apples to oranges. Not paying 4.5% interest on your mortgage is like getting 4.5% interest on a Certificate of Deposit - zero risk involved (ask your bank for a 4.5% CD and when they stop laughing, they will ask you politely to leave). Stocks CAN have a greater rate or return, or, like my GM stock, they can go down to NOTHING.3. Let's face it, that mythical money you are going to "invest" doesn't exist anyway. What you are doing is borrowing - and borrowing more than you need to - and then trying to make yourself feel like a financial genius by tossing around terms like "opportunity cost" and "inflation hedge". A better idea is to minimize the amount of money you borrow. Borrow what you need, not what you want.
4. Because you can end up losing all your money - or a lot of it - in stocks, and at the same time, see your house decrease in value by half, while the mortgage debt remains the same. Suddenly, you are upside-down on a mortgage, and broke as well. Whereas you could have had a paid-for house that would be worth something - or at least not be upside-down. This is why, in the olden days, you had to put down 20% as a down payment.
Is this last flaw a far-fetched scenario? Not really, it happened to a lot of people in February of 2009. They lost their shirt in the stock market and foolishly sold out, locking in their losses. They owed more on their houses than they were worth. So much for a "hedge" against anything.
The "hedge against inflation" argument falls along the same lines as "opportunity cost" arguments. Yes, for big businesses, such arguments make sense as they are making investments with their cash-flow which in turn generates profits. For the individual, they make less sense. When you borrow money to spend you are just spending, not making money. And no, you don't "make money" on your personal residence - at most you just get your money back. The average homeowner moves every five years, not every thirty. As a result, the effects of inflation are not felt by most of us, unless we stay in the same house for at least a decade or more.
And in case you haven't noticed, inflation has been at all-time lows recently - which is one reason interest rates are at all-time lows. When we had 10% inflation back in 1980, mortgage rates were 14%. You see, interest rates already factor in inflation. If banks didn't do this, they'd go broke in a heartbeat. So I am not sure that a mortgage is a "hedge" against anything. If anything it is just a risk you take, and risks are not hedging.
As people found out in 2009, if you do this, and the stock market tumbles and your home value tumbles, you end up losing all your money AND are now heavily in debt.
1. For self-employed people like me, who never know where the next paycheck is coming from - or indeed if there will be one, signing on to a large debt-train is a bad idea. That debt has to be serviced, regularly.2. For young people starting out, the point is moot - they don't have the money. They get a mortgage because they have to, not because of some opportunity cost theory.3. If you are approaching retirement, a paid-for house is a safe investment.4. Comparing 10% in the stock market (risky investment) with the 5% you save on mortgage interest is comparing apples to oranges. Stocks fluctuate - they can go down to zero. Not paying 5% interest is a 100% guaranteed rate of return, like a government bond.5. If you pay cash for a house, the $1500 a month you save on interest (for example) can be invested. So it is not like you will have no savings. And a paid-for house is one heck of a safe asset.
Granted, few people can afford to pay cash for a house. That is not my point. My point is, borrow as little as you can - what you need, not what you want. Avoid the temptation to serially refinance, but instead, work toward paying down the mortgage over time - with the goal being eventually being debt-free. Perpetual debt is not a hedge or an advantage. It grinds on you and limits your options. It is mortgaging your future, quite literally.