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A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower
by ThrustVectoring 9y ago
A 30-year amortized non-callable loan is much less risky than insurance float. It's also much less risky than a margin loan (which is at a correspondingly lower interest rate - best margin loan rates for small balances is roughly 2.6% at InteractiveBrokers, last I checked).
"Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors.
Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
- sedachv 9y ago> Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts. That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
- ThrustVectoring 9y agoI don't really, it's just a matter of risk avoidance, paying attention to what happened post-2008 housing crisis, and understanding the consequences of strategic default. If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.
- chrisweekly 9y agoThis description of (individual / personal) "strategic default" is interesting, maybe because it strikes me as a theoretical approach that is extremely rarely employed in real life. Corporations can and do consider bankruptcy a rational option under various circumstances, but -- maybe for a mix of cultural and legal reasons -- for individuals, there's a stigma, a sense of shame and failure, and it's viewed as a desperate measure of last resort. I know, citation needed...
- deleted 9y ago[deleted]