assume a couple is retiring and moving to Florida. They are buying a $300,000 house in The Villages ("Florida's Friendliest Retirement Hometown"). Because they sold their mortgage-free house in Boston, which they had lived in for 30 years, for $500,000, they could easily pay cash for their retirement home. However, the real estate agent in Florida encourages them to obtain a 20 percent down ($60,000) mortgage and finance the remaining $240,000. "After all," says the agent, "the interest rate on the mortgage balance is only 5 percent, and you can invest the $240,000 saved in stocks and earn 10 percent. Only a fool would buy a house for cash."

What do you think of the agent's advice? On the surface, the agent makes sense, but does risk enter into the decision? Assume that the proposed mortgage has a 15-year maturity and the interest rate on 15-year Treasury securities is 4 percent. Is this information relevant to the decision?

Answer rating: 100% (QA)

The real estate agents advice may seem appealing on the surface as it suggests leveraging borrowed funds to potentially earn a higher return on invest... View the full answer