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Paying cash vs. getting a mortgage

Jul 06, 2009 | | Comments Comments Off

Dear Liz: Maybe you can settle an argument a co-worker and I are having. We live in New York and work for a hedge fund administrator, but we’re not really savvy investors. Let’s assume my co-worker has $400,000 in cash, no debt, some money in a 401(k) and wants to purchase a home for $200,000.

Should she use 50% of her cash for this purchase even if she has the credit rating to get a great mortgage? She believes that not having a mortgage payment means she is debt free and better prepared in the event that she loses her job or meets hard times.

I believe that a mortgage is good debt and having $400,000 cash on hand is best so that I’m ready for the right investment opportunity. Who has the right idea?

Answer: You both do.

It’s pretty easy to make the case that you’ll make better long-term returns investing your money in a diversified portfolio of stocks and bonds than you would by paying off a low-rate mortgage.

But some people simply sleep better at night being debt free.

This, by the way, is not a scenario most people will face. Few have sufficient savings to pay cash for a house. Once they have a mortgage, they probably will have many, many better things to do with their money than pay down low-rate, tax-deductible debt, such as save for retirement, pay off high-rate debt, bolster their emergency fund and buy adequate insurance.

The invest-versus-pay-off-debt mortgage debate is less relevant than whether they have all their financial bases covered.

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