5 ms·

Your forgetting the tax write off of mortgage interest. Which needs to go into you equation no? That can be sizable.

by ProAm 9y ago

throw_away 9y ago
Note that this will be capped at interest on a value of $750k for houses bought starting this year, so less than before. I think the leverage angle is ignoring the fact that your equity can be wiped as well in a downturn. It's unlikely my index fund will go to zero (and if it does, we'll probably have bigger problems on our hands).
- phamilton 9y ago
  > leverage angle is ignoring the fact that your equity can be wiped as well in a downturn I call that out when talking about "no recourse". If you leverage 5X in the stock market and invest $1M in index funds and the market drops by 30%, you are on the hook for the $100k beyond your $200k you lost. If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation.
  - dash2 9y ago
    > If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation. But that seems dishonest.
    - Redoubts 9y ago
      Why? Lending is a risk on both ends.
    - phamilton 9y ago
      I absolutely agree it seems dishonest. But at the same time, it's in the contract. I'm aware of it, the bank is aware of it. They won't hesitate to foreclose on me if it's in their best interest according to the terms of the contract. Should I hesitate to take the action that is in my best interest?
    - rlpb 9y ago
      > But that seems dishonest. It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest. Think about it this way. The bank has effectively bought an insurance policy to protect itself against this event and is paying the premium out of your interest charges. Now does it seem dishonest?
      - zrail 9y ago
        In the US if you put down less than 20% the bank literally takes out an insurance policy called Primary Mortgage Insurnace for this risk and makes you pay for it.
      - rsync 9y ago
        "It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest." That's not a true equivalency. Unless your loan has language or provisions for "mailing back the keys", doing so is an act of default and regardless of how well (or poorly) the lender(s) has/have hedged against the default you are breaking the agreement. A real equivalency is stealing from walmart "because they can afford it". You shouldn't do that and you also shouldn't default on agreements you enter into.
        phamilton 9y ago
        > A real equivalency is stealing from walmart "because they can afford it" That's not a real equivalent at all. Walmart could press charges and recoup their loss through legal action. Stealing from Walmart is illegal. Defaulting on a contract is not illegal. That's precisely why we have contracts in the first place. It spells out what would happen in a default, and both parties voluntarily enter into the agreement. If one party is not happy with the terms of default then they shouldn't sign the contract. In a no recourse default, it is literally spelled out in the contract: "If you default, the lender will not be come after your other assets".
        9y ago
    - hueving 9y ago
      It's called a put option in the stock market. In this case its priced into the risk of your loan and you bought it by being in the state and taking a loan there.
klipt 9y ago
Sure, but that's a "the government is giving home owners a tax discount to encourage home ownership" argument, not a "leverage can turn inflation-tracking assets into inflation-beating assets" argument.
dingaling 9y ago
That's a uniquely American benefit. Most Western mortgage-payers have to pay out of post-tax income.
- jalk 9y ago
  Mortgage interest is tax deductible in the Scandinavian countries and in the Netherlands IFAIK
- Freak_NL 9y ago
  We have it in the Netherlands as well, although it is gradually being phased out.
- scarface74 9y ago
  As well as most Americans. You can either take the standard deduction of $24,000 as a couple or itemize. Most Americans don't buy homes where the interest is high enough to be over the standard deduction.
- emodendroket 9y ago
  From the article: > As with all articles on Afford Anything, these high-level concepts can be applied anywhere. But specifics about laws, taxes, inflation, etc., are geared at a United States audience. So I think it's fair to go ahead and mention US-specific counters to the arguments without specifying.
scarface74 9y ago
Not really. The average home price in the US is $200K (https://www.cnbc.com/2017/06/29/what-the-median-home-price-of-200000-will-get-you-across-the-us.html https://www.cnbc.com/2017/06/29/what-the-median-home-price-o...). You would have to buy a house with a mortgage of over $500K as a couple to make the interest more than the standard deduction. If you include the $10K cap on state taxes and property taxes, still with the average household income being 60K, most people won't be taking advantage of the mortgage interest deduction. The standard deduction is $24K for a couple.
jnwatson 9y ago
As of 2018 in the USA, the tax write off is much smaller now, given that the standard deduction is so high.
magduf 9y ago
This used to be a bigger benefit. Now with Trump's new tax law, the standard deduction has been doubled to $24k, so to make it worthwhile to itemize your taxes, you need to pay at least that much in mortgage interest, which equates to a rather expensive house. The new tax law is a really good thing for renters, not so good for house-buyers. I'm another one who was burned in the real estate collapse, and have been renting ever since. I was definitely not a trump voter, but I have to say his new tax plan looks like it's going to benefit me greatly. Another thing I've noticed people haven't mentioned here is the freedom that comes with renting. As with many in the tech industry, I don't normally stay at a single job for 20 years, but instead I end up changing jobs every few years. If I buy a house convenient to work, and then end up having to get a new job that's across town, I either have a horrible commute or I rent out my place and go rent a new one. As a renter, I can just give notice and find a new place in a better location.

Your forgetting the tax write off of mortgage interest. Which needs to go into you equation no? That can be sizable.

by ProAm 9y ago

Your forgetting the tax write off of mortgage interest. Which needs to go into you equation no? That can be sizable.

Note that this will be capped at interest on a value of $750k for houses bought starting this year, so less than before. I think the leverage angle is ignoring the fact that your equity can be wiped as well in a downturn. It's unlikely my index fund will go to zero (and if it does, we'll probably have bigger problems on our hands).

phamilton 9y ago
> leverage angle is ignoring the fact that your equity can be wiped as well in a downturn I call that out when talking about "no recourse". If you leverage 5X in the stock market and invest $1M in index funds and the market drops by 30%, you are on the hook for the $100k beyond your $200k you lost. If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation.
- dash2 9y ago
  > If you leverage 5X in a personal residence and the market drops by 30% (and you live in a no-recourse state), then you mail the keys to the bank and walk away. Very unique situation. But that seems dishonest.
  - Redoubts 9y ago
    Why? Lending is a risk on both ends.
  - phamilton 9y ago
    I absolutely agree it seems dishonest. But at the same time, it's in the contract. I'm aware of it, the bank is aware of it. They won't hesitate to foreclose on me if it's in their best interest according to the terms of the contract. Should I hesitate to take the action that is in my best interest?
  - rlpb 9y ago
    > But that seems dishonest. It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest. Think about it this way. The bank has effectively bought an insurance policy to protect itself against this event and is paying the premium out of your interest charges. Now does it seem dishonest?
    - zrail 9y ago
      In the US if you put down less than 20% the bank literally takes out an insurance policy called Primary Mortgage Insurnace for this risk and makes you pay for it.
    - rsync 9y ago
      "It's not. The bank has calculated and accepted the risk and factored it into your interest rate and other charges. Considering it to be dishonest is financially equivalent to considering a (not fraudulent) insurance payout to be dishonest." That's not a true equivalency. Unless your loan has language or provisions for "mailing back the keys", doing so is an act of default and regardless of how well (or poorly) the lender(s) has/have hedged against the default you are breaking the agreement. A real equivalency is stealing from walmart "because they can afford it". You shouldn't do that and you also shouldn't default on agreements you enter into.
      - phamilton 9y ago
        > A real equivalency is stealing from walmart "because they can afford it" That's not a real equivalent at all. Walmart could press charges and recoup their loss through legal action. Stealing from Walmart is illegal. Defaulting on a contract is not illegal. That's precisely why we have contracts in the first place. It spells out what would happen in a default, and both parties voluntarily enter into the agreement. If one party is not happy with the terms of default then they shouldn't sign the contract. In a no recourse default, it is literally spelled out in the contract: "If you default, the lender will not be come after your other assets".
      - 9y ago
  - hueving 9y ago
    It's called a put option in the stock market. In this case its priced into the risk of your loan and you bought it by being in the state and taking a loan there.

klipt 9y ago

Sure, but that's a "the government is giving home owners a tax discount to encourage home ownership" argument, not a "leverage can turn inflation-tracking assets into inflation-beating assets" argument.

dingaling 9y ago

That's a uniquely American benefit. Most Western mortgage-payers have to pay out of post-tax income.

jalk 9y ago
Mortgage interest is tax deductible in the Scandinavian countries and in the Netherlands IFAIK
Freak_NL 9y ago
We have it in the Netherlands as well, although it is gradually being phased out.
scarface74 9y ago
As well as most Americans. You can either take the standard deduction of $24,000 as a couple or itemize. Most Americans don't buy homes where the interest is high enough to be over the standard deduction.
emodendroket 9y ago
From the article: > As with all articles on Afford Anything, these high-level concepts can be applied anywhere. But specifics about laws, taxes, inflation, etc., are geared at a United States audience. So I think it's fair to go ahead and mention US-specific counters to the arguments without specifying.

scarface74 9y ago

Not really. The average home price in the US is $200K (https://www.cnbc.com/2017/06/29/what-the-median-home-price-of-200000-will-get-you-across-the-us.html https://www.cnbc.com/2017/06/29/what-the-median-home-price-o...). You would have to buy a house with a mortgage of over $500K as a couple to make the interest more than the standard deduction. If you include the $10K cap on state taxes and property taxes, still with the average household income being 60K, most people won't be taking advantage of the mortgage interest deduction. The standard deduction is $24K for a couple.

jnwatson 9y ago

As of 2018 in the USA, the tax write off is much smaller now, given that the standard deduction is so high.

magduf 9y ago

This used to be a bigger benefit. Now with Trump's new tax law, the standard deduction has been doubled to $24k, so to make it worthwhile to itemize your taxes, you need to pay at least that much in mortgage interest, which equates to a rather expensive house. The new tax law is a really good thing for renters, not so good for house-buyers. I'm another one who was burned in the real estate collapse, and have been renting ever since. I was definitely not a trump voter, but I have to say his new tax plan looks like it's going to benefit me greatly. Another thing I've noticed people haven't mentioned here is the freedom that comes with renting. As with many in the tech industry, I don't normally stay at a single job for 20 years, but instead I end up changing jobs every few years. If I buy a house convenient to work, and then end up having to get a new job that's across town, I either have a horrible commute or I rent out my place and go rent a new one. As a renter, I can just give notice and find a new place in a better location.