Making 10% or more in the market year after year is not a slam dunk. He did the right thing in not gambling with his primary residence and over leveraging himself.

What a nice tax bill he just bought.

He’s put himself into a position that he can hold, no matter what else happens in the market. He ain’t walking away from that house.

I think that if someone viewed their home primarily in terms of shelter and considered the gains in price from the runup to be paper gains rather than real money they could avoid looking at it in terms of profit/loss, and simply look at it as shelter.

If you look at the true cost of something as the amount of debt you take on to acquire it, this seems like a good move. He traded the potential earnings of the money he used for the down payment for a smaller mortgage loan and the definite reduction of interest paid on that loan over the years. I actually did something similar after selling (in 2005) the house I bought in 1997.

I agree— I think that he bought at the worst possible time – but if he is willing to risk the market drop to not be on the sidelines for a few years thats his choice. It’s a tough decision. If he is going to stay there for the next 10-20 years its not a dumb move. No one absolutely knows where prices are going – they could stay roughly flat for the next x years in which case he has his shelter and isn’t renting. If prices go down significantly (Which I think will happen) then he paid a huge extra fee for the convenience of buying now.

Personally I think that while economically it was a reasonable move, he will be kicking himself when he realizes that he spent an extra couple of hundred thousand to live in a house for a couple of years. If he could buy the same house in 2-3 years for 200K less – then it wasn’t the best move!

It is simply a risk play. We would all agree that buying the home may not be the best choice given the market conditions etc… Yet he will not have to worry about not paying the mortgage. I am in pretty much the same boat. We will be putting alot of cash down on a home. I cringe when I think about the return I “could” get with that down payment but my wife always reminds me about how much money I “could” lose on the flip side.

Anyways I think the point of the post was to question how you finance the home, not to beat the guy up for buying the home.

“Yet he will not have to worry about not paying the mortgage.” SD R

Truth is, bad things happen sometimes. People do lose their jobs, become injured and unable to work, have their identities stolen, etc…all of which can lead to ruinous credit scores and the inability to borrow money, even against home equity.

The ironic thing is that even though there is currently a tremendous percentage of equity in this guy’s house, there is always the chance that he may not be able to tap into it via borrowing, should something bad happen to him or lending programs change. The craziest part is that lenders are more apt to foreclose on someone with high equity than low equity due to the fact that there is a higher probability of getting out of the loan unscathed.

This was an awful move.

Remember…it is far easier to qualify for a loan when you don’t need one, than when you do. I’d pull some equity out for a cushion, or at least establish a credit line to be safe.