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Letter Re: Advice on Home Purchase: Minimize or Maximize Mortgage?
Dear James,
I really enjoy your blog and try to read it every day. My husband and I live in New Jersey. We just sold our house in May and are renting for a year while we try to figure out where to move next. Unfortunately, our home lost a lot of equity so we only have $55,000 to use towards our next house. Do you believe it is better to pay cash for a house or is it wise to get a mortgage since interest rates are so low? Our original plan was to buy our next home with cash, but I doubt that we have enough money.
Thanks, – L.Z. in New Jersey
JWR Replies: While some investment advisors see inflation on the horizon and hence advise mortgaging to the hilt (using a minimal down payment), I recommend a more cautious approach. At present, since deflation is still with us, I recommend keeping mortgages as small as possible, and paying them off as quickly as possible. In a deflationary environment where cash is king, a layoff that lasts six months could be devastating and result in a foreclosure. Once inflation re-emerges, it will be another matter. At that point you’ll be able to pay off your remaining mortgage balance with “cheaper dollars.” But for now, play it safe.
2012-10-02 18:55:57
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