Why you should invest rather than pay cash for a house — even with high interest rates
by Michael Blumenfeld | Aug 21, 2024 | blog |
Never underestimate the value of long-term investments. Investing early is just as important as insuring your existing assets.
Mortgage rates are at historical highs right now, at 6 and 7%. If you have the opportunity and the means to pay cash for a house, shouldn’t you do that to avoid the high interest rates?
While this may sound like an easy “yes,” I would advise my clients to take out a mortgage instead.
Make your money work for you
But Michael, you might ask, wouldn’t I end up paying hundreds of thousands of dollars in interest for that house?
Well, yes.
Say the house is worth $500,000. If you pay the minimum down payment and take out a loan for the rest, you would end up paying about $508,000 in interest over the next 30 years.
So why on earth would I suggest that option?
Because rather than avoiding high interest rates, you should make your money work for you.
Let’s say you buy the house and put 20% down to get the best rate. Rather than sinking the entire $500,000 into the house up front, you decide to invest your $500,000 into the stock market.
Over 30 years, if your money grew a very modest 6% return — that same rate you were scared of in a mortgage — you would actually make $3 million.
From that perspective, $508,000 in interest is an easy price to pay for a $3 million profit.
Thinking long-term
When we stop panicking about the present and look ahead to what’s best long term, things start to get a lot clearer.
Remember the rule of 12. In 12 years at that very realistic 6% return rate, your investment will double. In another 12 years, that new amount will double again. So that $500,000 investment would be $1 million in 12 years and $2 million in 24 years.
And that’s just using your very standard investment methods — like mutual funds and stocks.
Interest goes down the longer you pay on a loan. Paying it all up front or pouring extra money each month to pay it down faster means you’re ultimately wasting the time value of your money.
Either way, your house will be paid off by the end of those 30 years. But one option gives you time for your money to grow and work for you.
The other option just dumps money into a loan, where it lines someone else’s pocket. You’ve lost all that time that is needed for your money to double — or triple or quadruple.
Don’t forget to insure your assets
When you choose a mortgage over paying cash, remember that it’s crucial to insure your home — and yourself — to protect your assets. That way, if a natural disaster strikes before you finish paying the mortgage, your home insurance has you covered.
Or if you met an untimely death before the house is paid off, your life insurance would allow your loved ones to cover the balance of the loan — or at least continue to make payments.
Invest early to allow your money to grow AND protect those investments with the right insurance.
Let’s talk about your financial future so you can find the right protections. A holistic financial plan with me is free.
