Resurrecting the debate of Leverage using a house

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rocketdog
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Re: Resurrecting the debate of Leverage using a house

Post by rocketdog » Mon Mar 14, 2016 10:21 pm

Tyler wrote:1) If you can't afford to pay cash for the home, you can't afford it.
So... no one should ever finance anything?  Not even a college education?  That's not very realistic now, is it? 

Top-rated financial advisor Ric Edelman says there are 11 Great Reasons to Carry a Big, Long Mortgage

Personally, I carry a 15-year mortgage at 2.75%, so I only half agree with Ric.  But it's your money... you need to decide.  Just don't become house poor.  Our mortgage is less than 10% of our gross income, which enables us to max out every tax advantaged retirement account available to us.  Plus if one of us loses our job, we stand little risk of being foreclosed on. 
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Tyler
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Re: Resurrecting the debate of Leverage using a house

Post by Tyler » Mon Mar 14, 2016 10:48 pm

rocketdog wrote: So... no one should ever finance anything?  Not even a college education?  That's not very realistic now, is it? 
That's not what I said.  I simply think people should think critically about when it makes more sense to not buy a house.  There's nothing wrong with financing if you're smart about it, but too many people rush into it without considering the big picture. 

I do understand my position on debt is controversial in today's society.  But honestly it's nothing original -- it's the same view most of our grandparents had.  Just because you're expected to finance an insanely expensive college education and then immediately chase that with a new car lease and a 30-year mortgage after your first two paychecks doesn't mean it's a good idea.  People do have options. 

In any case, let me be very clear that everyone is different and I'm not trying to make some blanket statement for all people.  There are some markets where buying does make financial sense over renting.  I also don't judge people who got mortgages with little or no savings (I did so myself, although in retrospect I wish I had made a different choice).  I trust everyone here to make good decisions with their own money. 
Last edited by Tyler on Tue Mar 15, 2016 1:22 am, edited 1 time in total.
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Re: Resurrecting the debate of Leverage using a house

Post by sophie » Tue Mar 15, 2016 7:44 am

Often, the decision to buy a home has more to do with quality of life (and quality of housing) than finances.  Barrett is right to call a home a consumption item.  You can sell and move to a cheaper home later, but there's a huge overhead of cost & effort involved with that.

You may not agree with Tyler's rule, but it's better than relying on the real estate market's idea of affordability which I think is a catastrophic level of debt and a near-zero savings rate.  I like the rule about spending no more than your current amount of liquid savings on a house, because I'm in compliance with that one :-).  After that, it doesn't matter too much what you decide to do with the mortgage.  For what it's worth, my handling of the mortgage right now hinges on where my savings are located (tax-advantaged vs taxable), so that may be something for you to consider before deciding to pay down the mortgage - which is an irreversible action.
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Re: Resurrecting the debate of Leverage using a house

Post by technovelist » Tue Mar 15, 2016 10:42 am

rocketdog wrote:
Tyler wrote:1) If you can't afford to pay cash for the home, you can't afford it.
So... no one should ever finance anything?  Not even a college education?  That's not very realistic now, is it? 

Top-rated financial advisor Ric Edelman says there are 11 Great Reasons to Carry a Big, Long Mortgage
Most of that is one reason, with several different ways of describing it. That actual reason, of course, is inflation. Without inflation, none of those reasons make any sense at all.

Well, he also mentions the "tax advantages", which are available only to the extent that your deductions are greater than the standard deduction, which for most people amounts to very little. And even those assume that you can earn more than the mortgage rate, after taxes, which is not a certainty (to put it mildly).
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Re: Resurrecting the debate of Leverage using a house

Post by pugchief » Tue Mar 15, 2016 11:49 am

sophie wrote:
You may not agree with Tyler's rule, but it's better than relying on the real estate market's idea of affordability which I think is a catastrophic level of debt and a near-zero savings rate. 
And that is due to the ridiculous convention of a Realtor's compensation being tied to the sale price of the property. Is it twice as much work to sell a $500,000 house than a $250,000 house? Standardizing the commission to a flat amount rather than a percentage would go a long way toward changing that mentality.
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