We are in the process of buying a house. Our financial adviser wants us to put down a minimal deposit (20 percent to avoid PMI), borrow as much as we can at today’s rates (5.5 percent) and give him the balance as he is returning around 10 percent on mutual funds and stock market investments. What do you think?
Tony

Tony,

I think you should consider getting a new financial adviser. I was taught this same myth in college — use lower-interest debt to invest in higher-return investments. The problem is the assumptions used to get to the profit on the investment are wrong. The formula doesn’t factor in risk. The more debt you have, the more risk you take on. The bottom line is that after adjusting for taxes and risk, you don’t make money. I hate debt of any kind, but mortgage debt is the only kind I don’t yell about. Get a 15-year fixed-rate mortgage for the amount it takes to buy the house, then pay off the mortgage as fast as you can. When you have no payments, you can invest like crazy. In the long run you’ll be a lot better off.

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