how much leverage in buying a house?

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irwinmfletcher
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how much leverage in buying a house?

Post by irwinmfletcher »

I am trying to decide when to wade back into the housing market and have read all of the buying versus renting threads. In my situation I am not sure buying ever really comes out ahead economically speaking, but I suspect I will buy again at some point.

My question has to do with leverage, and how leveraged were you when you bought your last house?

After buying and selling 2 houses, with the 3rd it doesn't seem to make sense to buy a house unless I have at least 2 times the mortgage amount in liquid assets. In other words, for a $600,000 house with a $500,000 mortgage, I would need at least $1,000,000 in liquid assets after the purchase to buy. So a max leverage of about 31% ($1.6m assets, $500k liabilites).

Am I being too conservative? Not conservative enough? (Note: I still have about 20 to 25 working years left, so not near retirement).

Obviously one could pay cash and avoid a mortgage altogether, but I prefer the liquidity.

Full disclosure: when I bought my first house at age 28 my leverage was about 95%. Can't imagine doing that now.
LFKB
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Re: how much leverage in buying a house?

Post by LFKB »

To each his own. You're certainly being way more conservative than the general homeowner though. I would imagine most people have significantly less in liquid assets than the value of their mortgage.
Occupier
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Re: how much leverage in buying a house?

Post by Occupier »

Most advise against looking at a house as an investment. To me the issue is how secure is your job and how much is the payment as a percent of income. If a 15 year loan payment is less than or equal 25% of your income - buy. The rule of thumb per the governments HAMP program is that you can afford a 30 year mortgage payment of up to 31% of income. But I think that is the upward limit. Dave
gwrvmd
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Re: how much leverage in buying a house?

Post by gwrvmd »

When you are young, you don't use a leverage against monetary assets as a measure; if you needed 2x liquid assets of the cost of a home no young people could buy a home
When you are young measure debt against what you have the most of: Human Capital
Consider the following two investing maxims:
You are living beyond your means if you buy a house costing more than 2.5x average pretax household income.
A 30 year fixed rate mortgage is the greatest hedge ever invented against inflation..............Gordon
Disciple of John Neff
trudy
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Re: how much leverage in buying a house?

Post by trudy »

Just laughing at myself here. I bought my first house when I was young and jobs were plentiful (thank you, no longer existing American Savings & Loan for renting to a girl buying a house by herself, almost unheard of at the time.) Prices were climbing rapidly, so I didn't want to wait; even saving hand over fist while looking, I managed to just stay even with having 20% to put down.

I spent every cent I had on the purchase and getting a refrigerator (on sale, any color you like as long as it's avocado green.) I couldn't even afford to drive my car for about a year and biked everywhere, including to the grocery store. Hint: eggs do not survive a bike ride.
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midareff
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Re: how much leverage in buying a house?

Post by midareff »

I think every one has to look at their situation individually. If you can see yourself having stable long term employment, being in the same home for a period of time that makes the transaction viable after consideration of buyers costs and selling costs, and property tax, maintenance, tax advantages, etc., family consderations, then go for it.

A point to consider is the financing presently available... certainly generational lows that make owning, coupled with a still not so great housing market, as attractive as it can be IMHO. The local newspaper recently printed the local (Miami) housing market is up 19.8% here, year over year. If you have 20% down your investment (home) had a great year. If you had gotten locked at 3.0% or better, you can watch inflation eventually turn your mortgage into monthly chump change while it continues to drive resale prices upwards. The crash of the housing market is not much different than the 2007 stock crash IMHO, recovery will be made from both, both were/are investment opportunities.
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mrpotatoheadsays
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Re: how much leverage in buying a house?

Post by mrpotatoheadsays »

I don't believe in leverage. If I can't afford to pay for it, I don't buy it; I don't borrow for it.
patelbhavesh
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Re: how much leverage in buying a house?

Post by patelbhavesh »

mrpotatoheadsays wrote:I don't believe in leverage. If I can't afford to pay for it, I don't buy it; I don't borrow for it.
+1

I think too many people believe in the power of leverage but fail to understand that leverage can be double edge sword.There is no free money , risk free leverage.it is pure mental calculatioin and mental accounting on optimism.
Khanmots
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Re: how much leverage in buying a house?

Post by Khanmots »

mrpotatoheadsays wrote:I don't believe in leverage. If I can't afford to pay for it, I don't buy it; I don't borrow for it.
Meh, I view housing as a consumption item. I regard my mortgage payment as money that's not going to be seen again, or in other words, rent. It's an interesting landlord though, since the rent stays the same and eventually is going to drop. So... if I'd be ok with renting the place I'm at, I should be ok with having a mortgage on it.
Zytos
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Re: how much leverage in buying a house?

Post by Zytos »

It's posts like the OP that give me a reality check, and remind me how much the posters on this board are truly on the fringe of society's spending habits (ultra, ultra, ultra conservative).
bigred77
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Re: how much leverage in buying a house?

Post by bigred77 »

Zytos wrote:It's posts like the OP that give me a reality check, and remind me how much the posters on this board are truly on the fringe of society's spending habits (ultra, ultra, ultra conservative).
Lol. An awful lot of cities on the coasts where you need 600k for your basic, no-frills starter home. I didn't know you had to be a millionare to buy one.
NoVa Lurker
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Re: how much leverage in buying a house?

Post by NoVa Lurker »

irwinmfletcher wrote:for a $600,000 house with a $500,000 mortgage, I would need at least $1,000,000 in liquid assets after the purchase to buy. So a max leverage of about 31% ($1.6m assets, $500k liabilites).

Am I being too conservative? Not conservative enough? (Note: I still have about 20 to 25 working years left, so not near retirement).

Obviously one could pay cash and avoid a mortgage altogether, but I prefer the liquidity.
If this is a serious question, then, yes, you are being too conservative. You do not need $1m in liquid assets in order to borrow $500k for a $600k house. For what could you possibly need $1m in liquidity at that point?

In our case, we put about 40% down on our house, and we have a 15-year mortgage. I view our approach as very conservative.
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Meg77
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Re: how much leverage in buying a house?

Post by Meg77 »

I'm considering buying a house too, and for me the leverage ratio is irrelevant. I'm a banker and I can tell you we don't really care what your leverage ratio is either, at least when buying a homestead (a commercial loan to a business would be different).

What matters to me from a down payment perspective is that I still have 1 year of expenses in emergency cash as well as an appropriate amount of retirement funds for my age after the purchase. Appropriate means different things to different people, but for me it means not using any retirement sources for the purchase - and making sure I can afford to continue to max out my 401k and IRAs each year after factoring in ongoing housing expenses (which in my area are equal to if not less than rental rates anyway, so that part doesn't bug me at all).

Beyond that I will only put down 20% on a home given today's interest rates. A mortgage at 3.4% or for 30 years is almost like free money after inflation and tax deductions. I am debt averse so it's hard for me not to pay down my mortgages more quickly, but I just remind myself that I'm coming out way ahead by investing my money rather than paying extra on such a cheap loan. In a few years when savings rates are back up this will be even easier.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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EternalOptimist
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Re: how much leverage in buying a house?

Post by EternalOptimist »

Zytos wrote:It's posts like the OP that give me a reality check, and remind me how much the posters on this board are truly on the fringe of society's spending habits (ultra, ultra, ultra conservative).
Amen, and apparently on the upper fringe of wealth :!:
"When nothing goes right....go left"
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