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How I think about debt

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Re: How I think about debt

#101

Post by yowlingcat »

avgDev wrote: post #71
vlunkr wrote: post #10

Earlier quoted context omitted.

I tend to agree with Dave Ramsey on this point. A home loan is just about the only “good” type of debt for an individual to have. Because it tends to retain or gain value with little risk. He also recommends a 15 year loan instead of 30, which has been amazing for me.

While I think Dave can be helpful for some, having 30 year old loan makes more financial sense if you are financed at 3%. You can pay it off sooner if you want. The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money. Plus, even tbills are returning over 5% and are state tax exempt.

That's not always the case if you have a prepayment penalty on a mortgage (which isn't always the case but certainly something to watch for).

Re: How I think about debt

#103

Post by intuitionist »

voisin wrote: post #67
Nifty3929 wrote: post #59

Earlier quoted context omitted.

I think it's actually the reverse. The house is the only collateral, but traditionally you would still owe the deficit if the collateral couldn't be sold to pay off the whole loan. This is what's changed in recent decades. A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.

> A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house. This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to d…

I mean, manufacturing 30-year fixed rate fully pre-payable non-recourse mortgages does not happen in a free market. It takes a lot of government subsidies to make that happen—in particular the government assumes the credit risk on something like 85% of US mortgages. The United States government is very into the idea of spending its resources to subsidize homeownership. Canada has made different policy decisions, like single-payer healthcare. If the societal choice was between universal healthcare and extremely borrower-friendly mortgages (and I don’t think that it really works that way, at least not in such stark terms) I’m not sure I’d pick the mortgages.

Re: How I think about debt

#104

Post by pdonis »

francisofascii wrote: post #26
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfort…

But your primary home isn't an investment, it's a necessity. You're going to live somewhere. The only choice you have is whether to buy or rent the place you live in. So that's the comparison that should be made. Comparing your primary home to your stock portfolio is pointless because you can't live in your stock portfolio.

The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.

Re: How I think about debt

#105

Post by WalterBright »

Debt is a tool:

1. Use it to account for the mismatch between income and expenses.

2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house.

3. If you can borrow money at 5%, and invest it at 10%, you make money.

Using debt to buy frills, though, is not a great idea.

I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.

Re: How I think about debt

#106

Post by WalterBright »

leononame wrote: post #12
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

I think the article still holds up. A financial crisis where you lose your job, a war causing deflation, a housing bubble bursting are all events that could lead to you paying _much_ more than rent. If you can't pay, they'll take your house and everything else until they decide that the debt is paid. In case of a bubble bursting this can mean that you _still_ owe money after they took your house. This has happened to…

> they'll take your house

Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you.

I.e. you'll get the equity portion.

It's in your mortgage contract. Worth reading.

Re: How I think about debt

#107

Post by WalterBright »

voisin wrote: post #67
Nifty3929 wrote: post #59

Earlier quoted context omitted.

I think it's actually the reverse. The house is the only collateral, but traditionally you would still owe the deficit if the collateral couldn't be sold to pay off the whole loan. This is what's changed in recent decades. A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house.

> A lot (most? all?) primary-residence home loans in the US are non-recourse, meaning that you aren't liable for the deficit - you only lose the house. This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to d…

I read my mortgage papers carefully before signing. I made sure there was no early payoff penalty.

This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/

Re: How I think about debt

#108

Post by WalterBright »

francisofascii wrote: post #26
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfort…

Houses have always been a lousy investment for me. Once you factor in all the costs (property tax, insurance, repairs, 6% real estate commissions, the time the house sits empty waiting for a buyer, etc.) the returns are not that good at all.

Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.

Re: How I think about debt

#109

Post by WalterBright »

Tade0 wrote: post #83
francisofascii wrote: post #26

Earlier quoted context omitted.

People don't realize how risky housing is compared to other investments. It is risky because it is SO MUCH MONEY and it is not diversified at all. If your house loses half its value, that represents hundreds of thousands in losses. And don't think that can't happen. You buy a penny stock for $2K and lose half, no big deal compared to your house. BUT, we need housing, we need a stable school for our kids, or a comfort…

> If your house loses half its value, that represents hundreds of thousands in losses. I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house. Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?

> it's still the same house

What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.

Re: How I think about debt

#110

Post by anon7725 »

recursivedoubts wrote: post #70
tombert wrote: post #6

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leve…

debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's compl…

> debt for housing, which is a depreciating asset in normal times (housing wears out, land may become more expensive) is not a great idea, but it has been normalized and when you have negative real rates & inflationary policies, as we had for over a decade, it can make a lot of sense

Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset?

Seems that land is definitely, and housing for the most part, an appreciating asset over time due to scarcity.

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