Quote:
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Originally Posted by cpcollin
I was neglecting the fact that principal is reduced over the term of the loan. Even at the figures I quoted in my earlier message, you can earn more after tax than you pay in interest over the life of the loan. (ignoring time value of money, and assuming you can make the monthly payments from ongoing income)
Assume:
* $40k principal, 100% financed.
* 4.49% borrowing rate.
* 4.22% 5-year treasury yield. Paying coupons 2x/yr.
* 35% tax rate (applied at time coupon paid for simplicity)
* Able to reinvest coupons at same rate (4.22%)
The monthly payment works out to $745.54
First payment = (595.87 principal, 149.67 interest)
Second payment = (598.10 principal, 147.44 interest)
...etc..
Total interest paid over 5 years: $4,732
Total after tax gain on $40k invested: $5,837
Net: $1,105
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Your computation is not really fair. You should either take the $745.54 monthly payment out of your invested capital (slowly reducing it to almost nothing after 5 years, cutting your total gain in half, approximately), OR consider the investement gains on a extra account that accumulates $745.54 a month, which would give you about half of those $5837 gains, in the purchasing scenario.
In the end, you have both the interest spread and the taxes playing against you. Can't win unless you consider higher return (riskier) investements!