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by Christy Bieber | Published on Aug. 3, 2022
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Don't assume paying cash for a property is the smartest move for people with money.
Check out The Ascent's picks for the best mortgage lenders
Most people take out a mortgage because they have to. Homes are expensive, and chances are good the average individual does not have hundreds of thousands of dollars to just write a check for one.
But not everyone has to borrow to buy a house. Wealthy people with lots of money in the bank may have the option to pay cash for a home. But despite that, many people choose not to. And there’s one big reason why that’s the case.
The simple reason why most rich people do not pay cash for properties is that they can make a better investment with their money elsewhere rather than putting a large sum down on a home.
Most wealthy people have an almost endless array of things they can invest money in, from stocks and bonds to hedge funds and beyond. And many of the things they can invest in will provide a much better return than the interest they would save by not taking a mortgage loan.
Rather than tying up hundreds of thousands or millions of dollars in buying a home, wealthy people usually just borrow after making a reasonable down payment and researching their options to find an affordable lender. They then do things with their money that earn them more of it while making their mortgage payments over time.
The reality is, a home loan remains very inexpensive — especially for wealthy and well-qualified borrowers. Even with current rates above 5%, the return that comes from avoiding this interest is pretty minimal — especially when considering that wealthy people often itemize on their taxes so they can deduct interest on up to $750,000 in mortgage debt. Inflation is also making this even more attractive, as rich people with affordable fixed-rate loans will get to repay those debts with money that can’t buy as much in the future.
Wealthy people can opt to get affordable loans at a low rate, take a tax deduction that helps subsidize their interest, pay back their loans with “cheaper” money due to inflation, and use the cash they might otherwise have put down on a house to make an investment that stands a good chance of earning a higher return. Most rich people are not going to pass up this chance to use their money as productively as possible — especially since they will have the peace of mind of knowing they can pay off their mortgage sooner if they have to.
Whether you are wealthy with a fortune in the bank or have just saved up diligently, you may need to decide if it makes sense to buy a house with cash or borrow for one.
It’s important to look at the specific goals you have, but in almost all cases, you’ll likely find you’re going to end up better off in the end if you pay off your home loan slowly over time and use your money to make smart investments. By taking this approach that many rich people follow, you’ll stand a better chance of building wealth yourself.
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Christy Bieber is a personal finance and legal writer with more than a decade of experience. Her work has been featured on major outlets including MSN Money, CNBC, and USA Today.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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