Is It Better to Pay Cash or Get a Mortgage on a Home to Hedge Inflation?

If you have the cash to buy a house without a mortgage, that's very impressive -- but it may not be your smartest financial move. "CBS News," for example, points out that in an inflationary economy, taking out a mortgage helps protect you against inflation. It's one of several factors to consider in the mortgage-or-cash debate.

Inflationary Theory

With a mortgage, you stretch out the payments you make on the house over decades. The mortgage-hedge theory holds that during that time, inflation will reduce the buying power of your money: The mortgage payments you make 10 or 20 years from now represent less buying power than if you paid in cash today. High mortgage interest could eat away at that advantage but as long as you have an interest rate that's below the inflation rate you come out ahead.


One drawback to hedging against inflation is that it may not work. The financial website reported in Sept. 2012 that the Federal Reserve is pushing to keep inflation no higher than 2 percent in the coming years. If inflation is at 2 percent and your mortgage rate is, say, 4 percent, there's no inflationary benefit to taking out a mortgage. If the United States slides into deflation -- reverse inflation -- as the Japanese economy has, paying a mortgage actually costs you buying power.

Alternative Investments

If you don't pay cash, ask yourself what you'd do with your money instead. Suppose your house is $200,000. If you put down a $40,000 down payment and invest the rest at a higher rate of return than your mortgage interest, you come out ahead, regardless of inflation. The downside is that your investments may not pay off. Paying cash, on the other hand, is a certainty: You save years of interest you would have paid on the mortgage.

Comfort Levels

Along with the financial pros and cons, it's important to think about how you feel about taking on debt. Once you pay cash, you don't have to worry about being able to pay for years in the future. If you're not sure your job will be here next year, or you have a freelancer's erratic income, cash is safer. If your discomfort with debt outweighs the financial advantages of an inflation hedge, make the choice that will let you sleep best at night.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.