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I’ve noticed industry folks switch over to the bubble bloggers’ opinion that a house, used as a primary residence, should never be thought of as an “investment”.  Witness my compadre and colleague Sean Purcell:

Homeowners, on the other hand, should not be playing games with their home. I used to believe in the home as an investment, but I have joined a 12 Step program, made my amends and changed my wicked ways. Your personal home is not an investment and debt on that home is BAD. No matter what we think is going to happen, the best bet as a homeowner is to own your home outright and not be concerned with temporary gyrations in the marketplace. Then your only concern is the government taking your home through criminal abuse of eminent domain… but that’s another post altogether.

I’ll just stick with my usual contrarian opinion; I think you should leverage the heck out of your home today, especially if you plan to live in it for a decade or so.  Here’s why:

  1. mortgage rates are artificially low and probably won’t be low this time next year.
  2. inflation seems likely which means you’ll be repaying a loan made in today’s dollars with devalued future dollars
  3. although there is a supply/demand imbalance, and it is likely that scads of houses have yet to come on the market, eventually, this downward cycle in real estate will reverse.
  4. home equity is still a dead investment which earns no return. Diversifying that home equity into an investment that returns more than the mortgage rate is a good arbitrage play.
  5. if we’ve learned anything from this decline, a highly leveraged home transfers the “market risk” to the lender and away from the home owner.
  6. the mortgage interest deduction, while potentially in peril, is likely to remain the last and best middle-class tax break

I suggest that you should bet the house limit with these conditions:

  1. be certain you can afford to make the payment, regardless of what happens to the value
  2. diversify the money you withdrawal into an investment NOT tied to the housing market
  3. you might not try this if your house is in a market that seems perpetually doomed
  4. if your working life or expected hold time of the house is less than ten years, this strategy might not be suitable for you

There is FAR too much doom and gloom surrounding real estate as an asset class.  The negativity is understandable but overblown.  While there are over 18 million vacant houses, there are a lot of bargains to be had right now in promising markets.  I just can’t understand how a large down payment versus a large mortgage with cash-in-the-bank puts borrowers in the enviable position of being able to control their financial future.

A free-and-clear home will certainly keep you away from many risks but a leveraged property, with a properly managed investment account could provide for a much more comfortable retirement in later years.

Caveat Emptor.

About the Author

I'm Brian Brady, a 19 year veteran of the industry. I started my career with Merrill Lynch, as a financial adviser, right after I graduated Villanova University. I worked in the downtown Philadelphia office. I moved out west in 1992 and have worked in residential real estate lending since 1994. I have originated loans, managed branches, was the National Sales Manager for a regional mortgage bank, and successfully turned around an ailing mortgage banking firm to profitability. I'm back to my first love; working with clients in a financial advisory capacity. I consider myself a Mortgage Planner, which is a new title for mortgage originators who have expertise in financial planning. This means that you'll get a whole lot more than rate and points from me. I'll show you how to properly structure your debt so as to increase your liquidity, safety and return on your investments. I'll even show you a tax trick or two to run by your CPA. Call me at my office at (858)- 777-9751

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