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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.

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This week’s investing column (6/20)

I HATE DEBT. Abhor it. I use credit cards only for the convenience and the ability to get points toward something–airline tickets, cash back, whatever. When the bill comes in the mail, I always pay it off in full, usually rounding up to the closest $100 interval to give myself a head start toward the next month. Whenever possible I like to prepay for trips before taking them.

Despite that sentiment, I can’t ignore the fact that there are many very good reasons to take on debt these days, particularly mortgage debt. I’ve had this thought for months and decided to dedicate this week’s column to it after seeing an article to this effect in last Saturday’s Wall Street Journal.

The article, headlined “Leverage, Baby!” discussed the reasons why taking on debt makes sense these days. The WSJ puts it thusly: “The cold clarity of financial analysis points to an inescapable conclusion: There has never been a better time for people to borrow money.”

The reason, as the paper points out, is that interest rates are “just about as low as they can get, but future inflation could erode the paper value of loans, making debt even cheaper over the long run.”

The Federal Reserve’s current monetary policy is to flood the economy with money by keeping interest rates at historic lows. Though this is designed in the shorter-run to get the economy moving again, in the longer run it seems likely to create inflation, which reduces the purchasing power of dollars.

That’s no fun for someone on a fixed income whose savings accounts and pensions could be devastated. But inflation is a good thing for borrowers.

Thirty-year fixed mortgage rates are now below 5 percent, and 15-year fixed rates can be had for 4.2 percent. Adjustable-rate loans are even cheaper.

So let’s say you take out a 30-year fixed-rate mortgage at 4.8 percent and end up with a $1,200 monthly payment. That means you’d be paying $1,200 a month every month for the next 30 years. If inflation kicks in as many expect, that $1,200 will be worth significantly less at the end of the term. But that will still be the payment.

The kicker for mortgage debt–which in many ways makes it superior to other forms of debt–is that the vast majority of the payment in the early years is tax-deductible. There’s no guarantee that housing prices won’t fall more from here, but at least in the Fredericksburg area they’ve been stable for the past year and a half.

Don’t take this column as advice to go load up on debt or rush into buying a home if you’re not ready for that responsibility. But for people with sound finances and decent employment prospects, taking on measured debt could make a lot of sense.

Permalink: http://news.fredericksburg.com/businessbrowser/2010/06/20/this-weeks-investing-column-620/

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