I found this through NPR's Planet Money Blog:
http://modeledbehavior.com/2011/03/16/in-which-i-try-not-to-go-shrill/
My favorite part:
"Ok, so yes you should leverage your house to the maximum the bank will allow. You should always leverage to the maxim your counterparty will allow.
If you don’t get this then you don’t get the concept of “Other People’s Money” which is fundamentally superior to your own money, because it belongs to someone else. If you lose it, they are screwed. They could try to screw you in return but it is always harder to re-screw than to screw.
If there is screwing to be done you want to be the first one to screw, not the last. This is applicable in many contexts, but especially in finance."
I also love the title of the article and therefore I will now bookmark this blog.
So I just bought a house. If I bought a house that cost as much as my bank was willing to give me, I would be broke in 6 months by all accounts. Then I would have defaulted on my loan, so the bank forecloses on my home, kicks me out, and then I'm still broke. And on top of that no bank would give me a loan for a long time because my credit is shot.
ReplyDeleteI guess I could default on my loan without making any payments so I'm not broke, but I still get kicked out and I'd still have poor credit. Am I missing something?
I think he means, from a purely economic perspective, it's better to borrow on the cheap and use your own money for more lucrative investments. But it's just funny how he says it to me.
ReplyDelete