Author Topic: Take out large mortgage as investment ???  (Read 2210 times)

Offline JiB

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Take out large mortgage as investment ???
« on: June 10, 2011, 05:44:19 AM »
This is an idea put forward in a well-known American investment news report I subscribe to.
What do you guys think of it?
Please discuss!

PS I'm in Switzerland so I'm no judge of the wisdom of doing this in the US.

Quote
Here’s the smartest thing you can do with debt: Take out the largest, longest-term, fixed-rate mortgage you
can on your home. You’ll win as the dollar is destroyed, and you’ll win as interest rates eventually go to the
moon. And you’ll win as the asset you place the proceeds in appreciates.

This last part is critical. Borrowing $500,000 and then frittering it away will only leave you renting in a
trailer park. Take the money and buy gold. Or, perhaps, just leave it in secure short-term instruments that
will earn the high interest rates that are always the companion of high inflation. That money also will
be safest in a foreign jurisdiction, but if you keep it in the U.S., keep it in an IRA or other tax-sheltered
vehicle.

Yes, I know it’s a comfort living in a debt-free home. But even if it appears debt-free, your ownership is
no more than an ambiguity. Try not paying the property taxes, and you’ll find out who really owns it. The
bottom line is that, in a few years, you’ll see that mortgage as a gift.

Offline Malamute

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Re: Take out large mortgage as investment ???
« Reply #1 on: June 10, 2011, 06:26:28 AM »
I have come across ideas of this sort and while I am strongly expecting high inflation and dollar debasement, and while the approach you've referenced therefore seems like a good idea given the macroeconomic context, I find it extremely difficult to believe that TPTB haven't thought of this and already put the political/economic/banking policies in place to prevent nonoligarch Joe Schmos from benefitting from the situation. 

In other words I don't think the banks would allow you to take out a credit line based on your house unless they were sure you were enough of a credit risk that they had you by the balls anyway...as sick as it sounds I honestly think that banks are and have been under instructions NOT to loan out money TO PEOPLE WHO CAN LEGITIMATELY PAY IT BACK because THE BANKS ARE SPECIFICALLY AFRAID OF THE MIDDLE CLASS PURCHASING LARGE QUANTITIES OF PRECIOUS METALS OR OTHER COMMODITIES.

In fact a couple of years ago I wanted to obtain a $25000 personal loan from a giant american bank, and they basically looked at my spotless credit record and my offer to put up $20000 in collateral and laughed in my face.  THEY DO NOT WANT THE MIDDLE CLASS TO HAVE REAL WEALTH.  On the other hand they were very hot-to-trot to try to get me to buy a monsterbox tract house in a suburb and I recieved calls from their corporate offices for weeks afterward with their touts zealously trying to get me to go into debt on a house...I was making 55K a year and they were wanting me to buy into a 30 year mortgage on houses priced at 300-400K... 

Offline fritz_monroe

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Re: Take out large mortgage as investment ???
« Reply #2 on: June 10, 2011, 07:21:33 AM »
The big problem with doing something like this is you are putting all you money in a bet that the dollar will tank.

Do I think it will fail?  Yep, but I also know that there's a possibility that they will be able to stretch it out or even a slight possibility to reverse the course.  I know it is unlikely, but as Jack says, you don't want to bet completely on failure just like you don't want to bet completely on success.

Offline Morning Sunshine

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Re: Take out large mortgage as investment ???
« Reply #3 on: June 10, 2011, 07:39:27 AM »
I wouldn't.

Offline MTUCache

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Re: Take out large mortgage as investment ???
« Reply #4 on: June 10, 2011, 08:00:02 AM »
Horrible idea, in so many ways.

Quote
"You’ll win as the dollar is destroyed, and you’ll win as interest rates eventually go to the
moon. And you’ll win as the asset you place the proceeds in appreciates."

There's three statements there, and none of them are necessarily true.
1.)Yes, the dollar is unstable, but even the most avid anti-Fed guy has to admit that when the entire world has something to gain by the dollar not failing, it's probably not the safest thing to bet on (regardless of how you feel the odds are stacked).

2.) Yes, interest rates will go up. Having a fixed rate mortgage is an agreement between your lender and you. The US government is obviously in bed with your lender, and has a significant interest in them making money on your "investment", not losing it. While you may feel that their word on that "fixed rate" should hold throughout the loan, your lawyer may not be able to convince a judge of that after they've arbitrarily modified your loan without your consent. The banks will not lose money on your mortgage. It's as simple as that. If you're 10% below the rest of their rates, they will find a way to modify your loan.

3.) After the last two years, who the hell would feel confident that the value of their home would appreciate (in US dollars or whatever other commodity)? That's probably the most foolish statement out of all of these.

Quote
"Take the money and buy gold. Or, perhaps, just leave it in secure short-term instruments that
will earn the high interest rates that are always the companion of high inflation. That money also will
be safest in a foreign jurisdiction, but if you keep it in the U.S., keep it in an IRA or other tax-sheltered
vehicle. "

Yes, gold appears to be a rising commodity. Of course, two years ago would have been infinitely better for this plan than right now. One of the things that I respect Jack for the most is acknowledging that putting more than 10-20% of your assets in precious metals is risky. You hear it everyday, warnings about people getting their legs broken in bubbles. For every "expert" out there claiming that gold is the only safe investment there's a dozen guys out there selling gold and another dozen claiming it's in an unsustainable bubble.

Likewise, putting large chunks of it into a foreign jurisdiction means you don't have direct access to it, and you don't have full control over it. Same thing with an IRA. You think any of these are a low-risk opportunity? Let alone a sure thing to grow? Of course they aren't. They may be better bets, but they're certainly not worth a half million dollar gamble if you don't have that kind of cash to put down on the roulette table.

Quote
"But even if it appears debt-free, your ownership is no more than an ambiguity. Try not paying the property taxes, and you’ll find out who really owns it.

How could you have this view and not feel the same way about TPTB getting their hands into your note at the bank? Or the balance of your IRA? Or finding a way to tax you on wealth "deported" to other countries? Or sending agents to your house to confiscate your "illegal" gold? As long as we're assuming that the government is going to screw you, why add a middle man into the equation and get a bank involved too?

Now... all that being said... if you can afford it there's all sorts of pros and cons for both sides of this argument, and nobody has a crystal ball. Some will argue the tax deductions on the interest are worth it. Others will argue that putting your money anywhere is too risky. Nobody has the answers right now, but I think we'd all agree that if you can't afford it, it's a dumb idea all the way around.

Taking other peoples' money that you can't afford to pay back, and then essentially gambling with it (on whatever method of investment), hoping that you can reap the profits without taking any of the risk, is essentially what got us into this mess.