[squiffy]

In a recent post, which I cannot locate, one poster was saving up to buy a home. And he wanted to know some of the pros and cons of either paying for the home in cash or making a small downpayment and borrowing most of the money at 6%.

I thought the responses were excellent, but wanted to add two more points, which I don't recall being mentioned.

First, I believe you also need to consider inflation. If you borrow 100K today in 2005 dollars and pay it back slowly over 30 years, you will be repaying the loan in dollars that are worth less then the dollars you borrowed.

Assuming inflation at a typical historical rate of 2-3%, the borrower benefits from inflation and wants to delay repayment so that he is paying back in dollars that are worth less, due to inflation.

Note, according to some CPI calculators, $100 in 1975 is the equivalent of say $600 in 2005, 30 years later, due to inflation.

And, in the event of a major war or economic or political problems, there is a chance we could face major inflation as we did during the 1970s after the inflationary effects of the Arab oil embargo and the Vietnam War. I believe inflation was running at about 10-15% or more, which again, hugely favors borrowers. You borrow money today which has great value, and hopefully repay it with inflation-ravaged dollars that have less value.

In other words, if you know we will have 50% inflation for the next 30 years, starting tomorrow, then you would want to borrow as much money as you can today, buy assets which will hopefully hold their value despite inflation (say gold, commodities, or real estate)and laugh at the bank or creditor who was foolish enough to lend you $100 K and let you repay him with the equivalent of 50K or less in tomorrow's dollars.

My second point, is merely to illustrate a point which was already made in one of the other responses. If you borrow money at 6% and inflation is at 2%, you are really only paying a real interest rate of 4%. And after tax benefits of say 2%-3%, you are really only borrowing the money at a true cost of about 1-2%.

So, instead of paying 100K for the home in cash, if you can invest the 100K in other real estate or in stocks which reliably earn a real investment return of more than 2% after taxes, WITHOUT LOSING THE MONEY, then you are better off NOT PAYING CASH, but keeping the cash and investing it.

The magic of the American economy is that if you put down only 5% of the purchase price and sign a contract promising to pay the rest over 30 years, you have the legal right to call yourself the owner of the land and to profit from any gain in equity over that 30 year period, even if you havn't paid for the land yet.

So, if you can pay $5000, control the land, and invest your remaining cash in the stock market, why would you pay cash and drain your investment portfolio and forgo those POTENTIAL stock market returns.

For example, the leader of the stock investing competition made 45% in one month. I would like to know what investments the top 10 participants selected.

But clearly, if you can borrow money at 6% and invest it and make 20% a year on the stock market WITHOUT LOSING YOUR PRINCIPAL, then over 30 years, you should be better off investing.

Remember, society recognizes your ownership of the land, just based on the down payment and the promise to pay. So if the home goes up in price from 200K to 400K, then you have the right to sell it and pocket the 200K equity gain, even if you only put $5000 down, and even if you still owe 195K to the bank or mortgage co.

Last year, in July 2004, I had about 107K in my retirement account. It was in an IRA rollover account with an online discount broker. So tax deferred.

I bought about 9,400 shares of NOK at prices ranging from 11 to 15 or so, and sold them at about 16.5 a year later. After dividends etc. the balance a year later was about 160K. So the return was 49% or so.

Remember this is tax-deferred. And in a sense, I can keep that money there because I did not need it to pay for the home I live in. And the stock returns, assuming I don't lose everything, will grow tax-deferred for 30 years.

I bought a home in California in May 2002 for 200K. This week it was appraised at 420K. In theory, I have 220K equity in the home. I doubt the price will stay that high, as I believe CA property is way overvalued. In any event, I bought the home with no money down. So I didn't have to borrow any money from my retirement account or cash account to buy the home.

I just signed a piece of paper promising to pay for the home over 30 years and the bank loaned me 200K. Just like that at 6%.

These rates are some of the lowest rates Americans have seen in 37-40 years, since the 1960s.

In other words, money is a commodity, like filet mignon steak.

When banks are loaning money cheaply, you should borrow as much as you can safely afford to borrow, assuming you know how to invest it wisely and profitably.

If high quality filet mignon steak is on special sale today at $1 a pound, instead of at its normal price of $20 a pound, why not buy a lot while it's cheap.

Borrowing money at a real interest rate of 2% is a bargain we may never see again in our lifetimes.