No. of Recommendations: 9
Hi btanaka,

Just hypothetically, if someone could buy a first home without
a mortgage and using just half of that person's
liquid assets, would it be better to:
a. Get a mortgage for part of the payment, or
b. Just buy the home outright
What would the advantage be either way?

Really simple;
1)Real estate appreciates approximately at a mirror to inflation.
2)Liquid investments (S&P, DOW, et. al.) grow (even in today's "boring" environment) significantly faster. Yes, they go up AND down... but as every died-in-the-wool Fool will quickly point out, over the long-haul they greatly outperform... and we're comparing mortgage timeframes here... so we're definitely talking long-haul.

3) The U.S. government subsidizes you to borrow money from your real estate by a discount factor equal to your tax bracket. Thus, a 6 1/4% 30 year loan when you're in a 32% tax bracket means your mortgage money costs you approx. 4 1/4% per year.
4) The U.S. government offer's return-enhancing tax treatment to tax protected and tax deferred investments that are available to liquid investments primarily.

5) It's expensive to access your real estate equity if you need to, (you'll face expensive finance transaction costs if you need it without selling,)
6) It's inexpensive to access your liquid assets if you need to, (you can borrow against it quickly and inexpensively if you choose not to sell.)

7) Owning a home without any debt feels really good and secure,
8) Owning a home that is growing slowly but 100% financed, AND having an investment account equal to the entire financed mortgage (but that is growing much faster) makes you wealthy! To paraphrase Gordon Gecko; "Wealth is good!"

Grab that home you want... use your cash to negotiate a knock down deal... greenbacks can persuade unlike any old mortgage approval letter.

Then, when it's all yours at a discount, get back all your precious cash and put it where it will do you much more good... in strong, liquid investments.

All the best,
Dave Donhoff
The Power of Silent Liquidity
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