If you’ve been following Warren Buffett for some time, you’ll notice a subtle contradiction in the way he discusses money. At Berkshire, the man hoards money. He waits for the ideal price, sometimes for years. However, the infamously cautious investor becomes enthusiastic about borrowing when the topic of home loans comes up. The 30-year fixed mortgage has been referred to by him as “the best instrument in the world.” Not a necessary evil. The best.
His justification, presented in a 2017 CNBC interview that is still circulated, boils down to one term he consistently employs: asymmetry. If you lock in a rate for thirty years, you’ve made what he refers to as a “one-way bet.” You can refinance and pay less if interest rates drop. You sit tight and the bank absorbs the difference if interest rates rise. He stated, “It’s a one-way renegotiation,” and you can practically see the faint smile on his face. There is only the possibility of an upside and no actual downside. That structure is exceptionally generous for a regular buyer who does not have special access to deals.
Buffett’s real-life experience makes the advice more difficult to follow. He paid $150,000 for a home in Laguna Beach in 1971, but even though he could have paid cash, he took out a mortgage and only kept about $30,000 in equity. Why? He said, “I thought I could probably do better with the money,” and the money he freed up was invested in Berkshire stock, which is estimated to have grown to hundreds of millions of dollars. Of course, it’s an extreme example. Redirecting freed-up capital into one of the greatest compounding stories in market history is not what most of us are doing. However, the underlying principle is sound: avoid investing your money in a single illiquid asset when it’s not necessary.
The point is repeatedly echoed by history. When 30-year rates surged above 18% in the early 1980s, those who had locked in earlier appeared exceptional. Then, during the pandemic window, rates dropped to about 3%, and a large number of homeowners refinanced almost immediately. Every cycle silently rewarded those who waited and borrowed for a long time. Additionally, Buffett takes into account an inflation factor that most purchasers overlook: in year 25, a fixed payment is made with dollars that are significantly less valuable than those used in year one. Theoretically, your wages increase while the debt decreases.
The more difficult part is about to begin. The world has changed since the advice was developed during a period of low interest rates. Due to tight affordability and a reduction in the National Association of Realtors’ sales forecast, the 30-year rate is currently at 6.65% this spring. Whether the “one-way bet” is as clear to a young couple looking at a payment based on a 6.7% rate is still up for debate. Buffett would likely argue that the same reasoning applies: start on a higher floor, refinance if rates drop, and remain protected if they don’t.
Additionally, he would include the disclaimer that people usually ignore. He has cautioned that “if the buyer’s eyes are bigger than his wallet, a house can be a nightmare.”” Purchase items that you can carry comfortably. Don’t use your house as your primary source of wealth. It’s difficult to ignore the fact that the man who commends the mortgage also cautions against placing too much faith in the house itself. In some way, both statements are accurate.