Zero-risk vs. risk investments - apples and oranges

Dear Dave,

Let's say you have $1 million in the bank. Why would you take out $300,000 to buy a house, instead of just making a 20 percent down payment and keeping the rest of the money in mutual funds to make more money? If need be, I could still pay off the house.

Alex

Dear Alex,

Interesting question. Okay, I'm game.

The spread that you'd make between even a high-interest rate mortgage — let's say six percent — and mutual funds at 11 percent or so, is about five percent. And that's assuming nothing goes wrong, and you can get your mutual fund out if needed.

What you're talking about is theory, and what I'm talking about is actual life. In your theory you've left out two major issues: paying taxes on the mutual fund, which would make your yield less, and risk. You've compared a zero-risk investment with a risk investment, and you shouldn't do that. You must factor in risk so you can accurately compare one investment to another.

Every time you pay off a mortgage, the bank no longer charges you interest. That's zero risk compared to a mutual fund, which does have risk. Remember, if your house was paid for you wouldn't borrow $300,000 against it to invest in mutual funds!

-Dave

Dave Ramsey is America's trusted voice on money and business. He has authored five New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover, EntreLeadership and Smart Money Smart Kids. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.