Don't borrow money if you have cash in the bank

We recently signed the deal to buy a house. This has been a major topic of argument in our house for many years now, and I thought this would put an end to the disagreements.

Little did I know.

The raging issue in our house now is - how big a loan should we take?

I prefer to pay as much down as we can - while my wife and her father disagree with me. I have always felt uncomfortable owing someone money - to the extent that it's one of the principles of my life - never owe money if you can help it. My wife's father thinks I'm being "old-fashioned". Our discussions typically end with him trying to convince me that times have changed - how his grandfather also did not believe in loans (his family had many businesses) but everybody takes a loan now, to run their businesses. Just today, my wife's brother was mentioning how a Harvard MBA grad in their family was dead against paying down more than the minimum on a loan.

And it especially seems to make sense in the USA, where we don't have to pay tax on the interest.

So let's pay closer attention to my principle: Never take a loan if you have cash in the bank. If you don't have the money - sure, you should take the loan. But you should pay down as much as you can.

Here's why: When you take a loan from someone (and you had the money in the bank anyway) - you are betting that you will make more money with your savings than the interest payment. However, the guy giving you money is also betting the same thing - that his loan to you will give him more returns than he would have gotten otherwise. This is a win/lose transaction. One of you is going to lose. Each party in the transaction believes the other person will lose. How sure are you that you will be the winner? (sidebar: this is also the reason I don't believe in trading options or short-selling).

To which my wife's father would probably reply: banks are not making such an evaluation. They are virtually handing out the money because the federal reserve has lowered interest rates. But the bank is not the lender here. You need to look at the lender at the end of the chain. When you borrow money from Bank of America, Bank of America borrows money from the Federal Reserve. The Fed borrows money from the Treasury. The Treasury borrows from the Chinese Government.

So really, you're borrowing money from the Chinese Government. And you can bet that the Chinese Government is not a fool. The Chinese Government is a big player is these markets. You're entering into a win/lose transaction with the chinese government. How sure are you now that you'll make money on the market with your savings?