Purchasing a home. All-cash deal is feasible.

I believe that mortgage rates will be rising in the near future, say doubling in ten years. I do not believe mortgage rates will fall. I believe interest rates will also be increasing in the the next ten years.

Given the above scenario, does it make sense for an all-cash deal from a financial view. e.g. Guaranteed 4% return. What factors should be considered to determine all-cash deal, other than better bargaining position, guaranteed 4%, interest-deductions and taxes.

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    "I believe that mortgage rates will be rising in the near future, say doubling in ten years." From low to historically average? – RonJohn Sep 19 '19 at 18:17
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    Besides, the Feds just cut the Federal Funds Rate by 0.25%. Mortgage rates will soon follow suit. – RonJohn Sep 19 '19 at 18:19

RonJohn's comment on your question is telling:

Besides, the Feds just cut the Federal Funds Rate by 0.25%. Mortgage rates will soon follow suit

On the very day that you're saying "I do not believe mortgage rates will fall" they have essentially fallen. This should be informative in terms of predictions about rate changes in the future.

In a sense, this is an unanswerable question - none of us know if your predictions are true or not (although current day evidence would hold they are not). If you believe they will be true, you can compare the mortgage rate to the rate you would (expect to) get by using that cash elsewhere, and have your answer - making sure you discount based on advantages you'll get for having the mortgage, i.e. tax breaks on the interest you pay.

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  • That is what I am asking. If rates were to increase, what is gained by having a mortgage and paying off with "future dollars that are worth less with inflation". Trying to wrap my head around much reading. – paulj Sep 19 '19 at 19:00

what is gained by having a mortgage and paying off with "future dollars that are worth less with inflation"

You'd be paying a fixed monthly amount with dollars that are inflated in value. It's the perfect plan.

Imagine someone who bought a house in 1970 before "stagflation" hit and prices and wages jumped over the next 10 years. It's now 1980; his salary has more than doubled, but he's still making the same monthly payments as 10 years ago.

(Not that I think interest rates will double by 2029.)

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The value to be obtained is always relative to some other option - so what else would you do with the money, if not putting it down on a house?

Here's one way you could try to work it: put the money in some as-safe-as-one-can-hope-for guaranteed investment, such as treasury bills. Lets say that at the same time as you can get a mortgage for 4%, you can get a 2% return on a safe investment.

What this means is that you would then be paying an effective 2% interest rate on the borrowed money.

The gamble here is that the guaranteed rate of return investments are short-term, while the mortgage is long-term. If interest rates fall, you can pay off the mortgage as a kind of stop-loss, or refinance at the new lower rate. Obviously there are fees for the mortgage and for any refinance, but let's pretend there isn't for a minute.

Let's say rates increase and rates on mortgages and broader things like the bond/t-bill market run together, and we say that now you can safely invest at 4% rate of return. In this case you can move your liquid investments over to them, and now your mortgage is effectively free - the money you would use to pay it off is getting the same 4% as you are paying out, so there is no net profit.

If rates move even further, then you could take the money freed up by the mortgage and actually turn a little profit of a percent or two, as you borrowed money at a time when money was cheap and now you can effectively lend it out as a profit.

This is all effectively making your own "option", and you are paying a set fee of whatever your mortgage costs every year, set against the possibility of profit if a specific change happens (such as rates increasing).

The problem is that you are speculating on long-term macroeconomic factors you should not expect you can predict with any fine-grained accuracy, and you are taking on debt to allow you to take on speculative investments. This is a pretty great recipe for ending up misunderstanding your own exposure to risk, and the combination of debt with speculation means you are undergoing some very substantial risks (including the potential downside of losing your house because it is a secured loan) and doing so with borrowed money on top of it.

You should also plan for what you would do if guaranteed investments weren't paying enough back to make your bet payoff. Would the increase in rates encourage you to switch to riskier investments, as you start comparing the 4% mortgage to the 8-12%+ gains non-guaranteed investments are getting? For how many years would you be willing to pay this continual cost before you become swayed to increase your risk? Do you have the capital and the will to continue throwing money at paying the net mortgage costs? At what point would you decide you were wrong and decide to stop your losses?

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