It would be the height of foolishness to load up on debt now, right?Just look at the news these days. Homeowners are being foreclosed on at a record clip. Governments around the world are lurching toward insolvency. Job growth in the U.S. remains feeble at best. And at the center of the global economic storm are bad loans, which promise to weigh on consumers, businesses and governments for years if not decades to come.<><> <><><><>View Full ImageAnd yet—and yet!—the cold clarity of financial analysis points to an inescapable conclusion: There has never been a better time for people to borrow money, whether to buy financial assets or boost cash reserves.For sophisticated, disciplined investors who have lived and invested within their means—and perhaps decried the bailouts being lavished on those who haven’t—this is your time to take advantage. Not only are interest rates 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 first step involves making peace with the idea of taking on new debt at this perilous moment in global economic history.It isn’t an easy concept to embrace. While the inflation scenario seems likely over the long term, there is a small but growing chance that the global economy could suffer from the opposite problem, deflation. Japan could be the template for the kinds of problems facing the U.S. and other advanced economies: years of tepid growth and falling asset values and prices.That would make new debt more expensive over time, not less so. It would also mean that the job market is headed for a longer slump than even the direst estimates now suggest. Then again, the moments that seem the bleakest often turn out to be inflection points. Alan Greenspan has famously said that the worst of loans are made at the best of times. The opposite holds true as well.Most important, “there’s nothing inherently wrong with leverage,” or borrowed money, says Christopher Jones, a New York financial planner working with high-net-worth clients. For people with the capacity to take on debt, who understand it and can tolerate the risk, “now is an ideal time to leverage cheap dollars to buy into areas that can produce much higher returns over the longer term,” he says.Mr. Jones is advising clients who can afford to pay cash for a home to take out a mortgage instead and invest the funds in a ersified portfolio. “If you look at where the market is now and where it could be five to 10 years from now, the return potential is significant,” he says. Ideally, investors would want to borrow at rates below 5% and invest the money in a well-ersified portfolio aiming to return 8% a year over 10 to 15 years.”You don’t want to be borrowing money and going to Vegas with it,” Mr. Jones says.There are many ways to exploit leverage smartly right now, from simple and safe to complex and risky, on loans big and small, for consumers and investors alike. Here are a few.
Mortgages
Nationwide, loans on 30-year fixed-rate mortgages were about 4.9% on June 10, down from 5.3% in January and within a few hundredths of a percentage point of a 50-year low, according to HSH Associates, a financial publisher in Pompton Plains, N.J.Moving out on the risk curve can yield even bigger savings. Amy and John Rydland of North Pole, Alaska, used a riskier adjustable-rate mortgage, or ARM, to upgrade to a bigger home in Colorado Springs, Colo., a city to which they are in the process of relocating. Last month, the Rydlands locked in a 3.875% rate with no points on a 5/5 ARM with Pentagon Federal Credit Union in Alexandria, Va., which serves military members.But unlike typical ARMs, whose rates can reset every year, the Rylands’ loan adjusts only every five years, with each adjustment capped at two percentage points and a lifetime cap of five points. The low rate “gave us more choices with the houses we had to choose from,” says Ms. Rydland, a 41-year-old housewife with three kids whose husband, John, is a lieutenant colonel in the U.S. Air Force. “Being military, we don’t stay in one place very long, but this is a move that we’re hoping to maybe stay a little bit …
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