Sunday, May 15, 2005

The New Mortgage Casino

The Ledger tells us that even academics are advocating high risk strategies. Roger Ibbotson, a finance professor, "'If you want to lever up, you could do it with your mortgage.' Keep in mind that borrowing at 6 percent to buy stocks is no slam dunk."

"Let's say you have a $400,000 house, $320,000 in mortgage debt and $300,000 invested in stocks and bonds. You probably consider that mix pretty conservative."

"Your finances aren't that different from someone who has a $400,000 house with a $200,000 mortgage and a $300,000 portfolio partly financed with a $120,000 margin loan. After all, you both have $700,000 in total assets and $320,000 in total debt."

The NASD warned that people are using billions of dollars from home equity loans to buy stocks, so the typical borrower is much more at risk than these scenarios. It is a sign of the times when the writer has more sense than the experts.

"We all tend to engage in mental accounting, viewing our home and mortgage as separate from our investment portfolio. But look at the big picture, and you will realize you owe more money than you are owed and you are paying a higher interest rate than you are getting paid. What to do? For starters, you might want to use some of your savings to pay down your mortgage."

5 Comments:

At 3:13 PM, Blogger John Law said...

("Your finances aren't that different from someone who has a $400,000 house with a $200,000 mortgage and a $300,000 portfolio partly financed with a $120,000 margin loan. After all, you both have $700,000 in total assets and $320,000 in total debt.")

I don't understand this paragraph.

 
At 4:14 PM, Anonymous Anonymous said...

I believe it is to be read as a combined amount, then compared to the numbers in the paragraph preceding it.

 
At 8:27 AM, Anonymous Loren said...

The advantage of a mortgage over a margin loan is that a mortgage won't get called if your house value goes down.

The advantage of a margin loan is that you won't lose your house,(because of the structure of the deal you can always pay it off).

I suppose if you don't mind living out of your car you could go ahead and leverage your house to buy overpriced stock that likely doesn't pay more than a 2% dividend.

 
At 8:27 AM, Anonymous Loren said...

The advantage of a mortgage over a margin loan is that a mortgage won't get called if your house value goes down.

The advantage of a margin loan is that you won't lose your house,(because of the structure of the deal you can always pay it off).

I suppose if you don't mind living out of your car you could go ahead and leverage your house to buy overpriced stock that likely doesn't pay more than a 2% dividend.

 
At 11:25 AM, Anonymous Anonymous said...

At this point, it wouldn't be surprising to see some of the car financing deals appear for real estate.

"Zero, zero, zero! No money down, no interest, and no payments for a full year! Plus, we'll give you cash back to buy our house!"

 

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