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Old 02-07-2013, 08:03   #27
Dennis in MA
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Join Date: Aug 2001
Location: Taunton, MA
Posts: 52,503
Originally Posted by DanaT View Post
This isnt exactly a poor decision.

1) They get a tax break and lower their income tax bracket based upon mortgage interest and property tax paid.

2) The house, including the financed part, is appreciating. As long as the appreciation is equal to or higher than than the finance interest rate, one is making money on the house. Debt that you make money on is good debt. In the financial world this is called "leveraging"

If you combine number 1 and 2, it is actually not a decision to have a valuable piece of property.
I don't want this to look like I'm starting a pee-ing contest, Dana. LOL If so, I need to drink more water first. LOL

BUT. . . .

5x salary for a house is a baaaaaaad idea for everyone.

1. Even at today's rates, a person would be spending too much of their total income on housing. One little blip and we have a massive housing problem. . . again. It's nicer now because interest rates are down, but you are still talking PITI of 30%+ Back when I bought my first house in '94, PITI was somewhere around 24% max and PITI+totaldebt was 27%.

2. Tax break - FUDGE THEM! This was the biggest part of Simpson Bowles I wanted enacted. Basically I'm paying the moron to buy a 5x house. Because they get a tax break, I pay more. F that. It deludes them into thinking #1 above is do'able (and with a blip in their income, they can't afford the mortgage AND they have no tax break in the first place to fall back on).

5x salary homes are a pipe dream and should be discouraged by banks. Thankfully, they are at this point.

3. You are assuming a LOT of appreciation. Good luck with that. I've been through 2 housing crashes so far. The math doesn't work that way.

4. You can't spend your house. Let's say you buy House X for $150,000. You leverage it to the hilt for 30 years. In 20 years, you owe $50K on it and the house is worth. . . .$300K. (Aside: I purchased my house in the LAST housing recession. If I were to sell it today, 19 years later, it's worth about 50% more, not double, but I'll give you a double.) So I've got $250K of equity. PARTAYYYYYY!!!! Until I have to eat it. My choices are mortgage it back to the hilt and hope I don't lose it, reverse mortgage or sell it and buy DOWN. (Something I don't see people doing in practice. People buy SIDEWAYS at best.) You don't gain some sort of edge, financially. You gain the same house, nothing more. What it is worth now and/or later are just mathematical place-holders with no real value because you can't eat the woodwork.

Don't buy a 5x house, people. Not now, not ever. It's a bad move.

PS - no one is buying a 10x house now. The banks won't allow it. I'd argue they won't do a 5x anymore. At least not for another decade or so.
The truth is you're the weak. And I'm the tyranny of evil men. But I'm tryin', Ringo. I'm tryin' real hard to be the shepherd.
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